Integrated Financial Holdings, Inc. First Quarter 2023 Financial Results

RALEIGH, N.C., May 01, 2023 (GLOBE NEWSWIRE) -- Integrated Financial Holdings, Inc. (OTCQX: IFHI) (the “Company” or “IFHI”), the financial holding company for West Town Bank & Trust (the “Bank”), released its financial results for the three months ended March 31, 2023. Highlights from the 2023 first quarter results include the following:

• First quarter net income of $2.4 million, or $1.04 per diluted share compared to first quarter 2022 net income of $3.6 million, or $1.59 per diluted share.   
• Net interest income of $5.7 million for the first quarter of 2023, compared to $5.2 million for the same period in 2022.  
• Return on average assets of 2.07% for the three-month period ending March 31, 2023, compared to 3.30% for the same period in 2022.
• Return on average tangible common equity (a non-GAAP financial measure) of 13.67% for the three-month period ending March 31, 2023, compared to 20.36% for the same period in 2022.

Both quarters were impacted by mark-to-market adjustments on marketable equity securities with a large portion of the year-over-year decline in net income resulting from the difference in that adjustment. Pretax net income declined by $1.8 million from $5.0 million in the three months ended March 31, 2022, to $3.2 million for the same period in 2023 yet the mark-to-market adjustment declined by $4.0 million during that same time.

In reflecting on the first three months of the year, Marc McConnell, President and CEO of IFHI, stated: “From an organizational standpoint, the first quarter was highlighted by two overarching themes – resilience and teamwork. Beginning with the unexpected death of our founding CEO in the first week of the quarter and continuing with the broader challenges faced by the banking industry in March, our entire team was called to action. I must say, I could not be prouder of the way our staff has performed.” McConnell continued, “The recent bank failures placed a spotlight on the importance of sound risk management practices and governance and the speed with which underlying assumptions can change. We have not been impacted by any unexpected runoff of deposits, and we remained laser-focused during the quarter on cost containment and right-sizing the Bank, particularly with the resolution of certain government programs such as the Paycheck Protection Program. Our compensation expense is down 21% year-over-year and 10% from the prior quarter. In addition, the Bank’s ratio of problem assets as a percentage of total assets continued its five-quarter downward trend, bolstering confidence in overall credit quality. As expected, non-interest-bearing deposits dropped due to the recent winddown of our hemp and cannabis banking divisions. Going forward, we remain focused on reinforcing our strongholds and realigning our strategy for new challenges as we adapt to changing market conditions and shape the next chapter for IFHI under the leadership of our restructured executive management team.”

BALANCE SHEET
On March 31, 2023, the Company’s total assets were $467.3 million, net loans held for investment were $313.5 million, loans held for sale (“HFS”) were $39.1 million, total deposits were $356.3 million and total shareholders’ equity attributable to IFHI was $90.8 million. Compared with December 31, 2022, total assets increased $19.4 million or 4%, net loans held for investment increased $19.4 million or 7%, HFS loans increased $4.8 million or 14%, total deposits increased $43.2 million or 14%, and total shareholders’ equity attributable to IFHI increased $3.3 million or 4%. Cash and cash equivalents decreased slightly since the prior year-end as the Company has redeployed an additional $5.8 million in cash into higher yielding loans. The Bank has continued to see growth in loans held for investment primarily as a result of activity in the Government Guaranteed Lending (“GGL”) type loans. At $39.1 million in volume, HFS loans at March 31, 2023 represent potential significant future GGL revenues as those loans are sold in the market and the associated premiums are recognized. Noninterest bearing deposits have decreased by $29.7 million or 28% since December 31, 2022, resulting largely from the Company’s decision to discontinue banking two industries the Company had previously targeted.   The increase in total shareholders’ equity since December 31, 2022 was primarily associated with the posted net income. The market value of the available-for-sale investment portfolio improved slightly since year end with the accumulated other comprehensive loss component of equity related to the change in market pricing improving from a loss of $2.3 million at December 31, 2022 to a loss of $2.2 million at March 31, 2023 as a result of changes in market interest rates. The Company does not have any investments in its portfolio treated as held-to-maturity being carried at cost.

CAPITAL LEVELS
At March 31, 2023, the regulatory capital ratios of West Town Bank & Trust exceeded the minimum thresholds established for well-capitalized banks under applicable banking regulations.

	"Well Capitalized" Minimum	Basel III Fully Phased-In	West Town Bank & Trust
Tier 1 common equity ratio	6.50%	7.00%	12.96%
Tier 1 risk-based capital ratio	8.00%	8.50%	12.96%
Total risk-based capital ratio	10.00%	10.50%	14.21%
Tier 1 leverage ratio	5.00%	4.00%	11.50%

Primarily as a result of net income, the Company’s book value per common share increased from $38.69 as of December 31, 2022, to $40.28 at March 31, 2023. The Company’s tangible book value per common share (a non-GAAP financial measure) also increased from $30.36 as of December 31, 2022, to $31.99 at March 31, 2023, primarily as a result of net income.

ASSET QUALITY
The Company’s nonperforming assets to total assets ratio decreased from 1.04% at December 31, 2022, to 1.03% at March 31, 2023. Nonaccrual loans at March 31, 2023 decreased $67,000 or 1% as compared to December 31, 2022. The Bank held $315,000 in foreclosed assets as of March 31, 2023 compared to $101,000 at December 31, 2022.

The Company adopted ASU 2016-13 on January 1, 2023. The day one adjustment to the allowance for credit losses was a reduction of approximately $807,000, resulting in an allowance for credit losses of approximately $5.8 million. In addition, the adjustment to the reserve for unfunded commitments was an increase of approximately $100,000, bringing the overall allowance for credit losses on loans to $5.9 million. This adjustment was charged to retained earnings, net of the Company’s effective tax rate.

During the first quarters of 2023 and 2022, the Company recorded provisions for credit losses of $565,000 and $180,000, respectively. The Company recorded $376,000 in net charge-offs during the first quarter of 2023 compared to $105,000 in net charge-offs for the same period in 2022. Management continues to believe it is making progress in improving overall asset quality. Set forth in the table below is certain asset quality information as of the dates indicated:

(Dollars in thousands)	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
Nonaccrual loans	$	4,485		$	4,552		$	4,612		$	4,656		$	6,558
Foreclosed assets		315			101			-			-			-
90 days past due and still accruing		-			-			-			-			-
Total nonperforming assets	$	4,800		$	4,653		$	4,612		$	4,656		$	6,558
Net charge-offs (recoveries)	$	376		$	(149	)	$	(29	)	$	(279	)	$	105
Annualized net charge-offs (recoveries) to total average portfolio loans		0.49	%		-0.20	%		-0.04	%		-0.43	%		0.16	%
Ratio of total nonperforming assets to total assets		1.03	%		1.04	%		1.05	%		1.07	%		1.52	%
Ratio of total nonperforming loans to total loans, net of allowance		1.43	%		1.55	%		1.60	%		1.79	%		2.56	%
Ratio of total allowance for credit losses to total loans		1.88	%		2.23	%		2.27	%		2.39	%		2.14	%

NET INTEREST INCOME AND MARGIN
Net interest income for the three months ended March 31, 2023 increased $432,000 or 8% in comparison to the first quarter of 2022 as increasing loan yields year-over-year were partially offset by increased funding costs. Loan yields increased from 7.74% in the first quarter of 2022 to 8.21% for the same period in 2023. The increase in yield from the prior year reflected the impact of 475 basis points of rate increases by the Federal Open Market Committee (“FOMC”) since the beginning of 2022 in response to current economic conditions, as well as a change in loan mix. Overall cost of funds increased from 0.63% in the first quarter of 2022 to 2.01% for the same period in 2023 as average retail certificate of deposit (“CD”) rates trended up, and new CDs were originated at higher market rates. Net interest margin increased from 5.69% during the three months ended March 31, 2022, to 5.85% for the same period in 2023. The increase in margin was also driven by the increase in loan yield resulting from the FOMC actions.

(Dollars in thousands)	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
Average balances:
Loans	$	345,651		$	331,508		$	312,475		$	319,115		$	294,502
Available-for-sale securities		17,691			17,446			19,096			21,879			21,088
Other interest-bearing balances		28,998			20,367			30,378			33,328			56,359
Total interest-earning assets		392,340			369,321			361,949			374,322			371,949
Total assets		460,412			436,695			428,983			438,732			437,402
Noninterest-bearing deposits		98,555			113,851			94,013			85,042			98,546
Interest-bearing liabilities:
Interest-bearing deposits		251,281			212,069			233,464			244,363			235,092
Borrowings		10,222			8,913			2,174			8,626			6,306
Total interest-bearing liabilities		261,503			220,982			235,638			252,989			241,398
Common shareholders' equity		88,574			84,831			88,043			90,721			90,441
Tangible common equity (1)		69,788			65,879			68,924			71,437			70,939
Interest income/expense:
Loans	$	6,997		$	6,422		$	5,943		$	5,491		$	5,623
Available-for-sale securities		120			64			105			104			89
Interest-bearing balances and other		319			257			169			89			42
Total interest income		7,436			6,743			6,217			5,684			5,754
Deposits		1,696			735			532			523			522
Borrowings		85			93			13			15			9
Total interest expense		1,781			828			545			538			531
Net interest income	$	5,655		$	5,915		$	5,672		$	5,146		$	5,223

(1) See reconciliation of non-GAAP financial measures.

	Three Months Ended
	3/31/23		12/31/22		9/30/22		6/30/22		3/31/22
Average yields and costs:
Loans	8.21	%	7.69	%	7.55	%	6.90	%	7.74	%
Available-for-sale securities	2.71	%	1.47	%	2.20	%	1.90	%	1.69	%
Interest-bearing balances and other	4.46	%	5.01	%	2.21	%	1.07	%	0.30	%
Total interest-earning assets	7.69	%	7.24	%	6.81	%	6.09	%	6.27	%
Interest-bearing deposits	2.74	%	1.38	%	0.90	%	0.86	%	0.90	%
Borrowings	3.37	%	4.14	%	2.37	%	0.70	%	0.58	%
Total interest-bearing liabilities	2.76	%	1.49	%	0.92	%	0.85	%	0.89	%
Cost of funds	2.01	%	0.98	%	0.66	%	0.64	%	0.63	%
Net interest margin	5.85	%	6.35	%	6.22	%	5.51	%	5.69	%

NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2023, was $6.6 million compared $10.3 million for the same period in 2022. The decrease is primarily attributable to a difference in each period’s mark-to-market income adjustment on the Company’s equity investment in Dogwood State Bank due to successful capital raises for Dogwood in the first quarter of both years. The capital raises helped to establish new market values. The prior year’s first quarter had a positive mark-to-market of $6.0 million compared to $2.0 million for the current year. Excluding the Dogwood investment adjustment, other noninterest income would have been $4.6 million in the first quarter of 2023, up $305,000 or 7% in comparison to $4.3 million for the same period in 2022.

Specific items to note include:

• Windsor Advantage, LLC (“Windsor”), a subsidiary of the Company which offers an SBA and USDA loan servicing platform, had processing and servicing revenue totaling $2.4 million, an increase of $232,000 or 11% as compared to the $2.2 million in income earned during the same prior-year period.
• Mortgage revenue totaled $173,000 for the first quarter of 2022 compared to $0 in 2023. Due to the nationwide slowdown in refinancing volume and the impact of a doubling of long-term mortgage rates year-over-year, the Company phased out its mortgage operations by the first quarter of 2023.
• Government Guaranteed Lending revenue was $904,000 in the first quarter of 2023, a decrease of $220,000 or 20% in comparison to the $1.1 million of revenues for the same period in 2022.  
• The Company had bank-owned life insurance income of $555,000 in the first quarter of 2023 compared to $25,000 for the same period in 2022. The increase was related to a life insurance policy payout related to the previously announced death of the Company’s founding CEO, Eric Bergevin.

NONINTEREST EXPENSE
Noninterest expense for the first quarter of 2023 was $8.5 million, a decrease of $1.9 or 18%, from $10.4 million for the first quarter of 2022. This change was primarily due to a decrease of $1.5 million or 21% in compensation expense going from $7.1 million in the first quarter of 2022 down to $5.6 million for the same period in 2023 as the Company made efforts to decrease its overhead in light of the changing economic environment. Loan-related expenses, which tend to fluctuate unexpectedly, also decreased by $345,000 or 54% from $638,000 in the first quarter of 2022 to $293,000 for the same period in 2023. These decreases were partially offset by merger-related expenses of $116,000 paid in the first quarter of 2023 associated with the Company’s proposed merger with MVB Financial Corp. (“MVB”) announced during the third quarter of 2022.  

ABOUT INTEGRATED FINANCIAL HOLDINGS, INC.
Integrated Financial Holdings, Inc. is a financial holding company based in Raleigh, North Carolina. The Company is the holding company for West Town Bank & Trust, an Illinois state-chartered bank. West Town Bank & Trust provides banking services through its full-service office located in the greater Chicago area. The Company is also the parent company of Windsor Advantage, LLC, a loan service provider that offers community banks and credit unions with a comprehensive outsourced U.S. Small Business Association (“SBA”) 7(a) and U.S. Department of Agriculture (“USDA”) lending platform. The Company is registered with and supervised by the Federal Reserve. West Town Bank & Trust’s primary regulators are the Illinois Department of Financial and Professional Regulation and the FDIC.

For more information, visit https://ifhinc.com/.

Important Note Regarding Forward-Looking Statements
This release contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of the Company and on the information available to management at the time this release was prepared. These statements can be identified by the use of words such as "expect," "anticipate," "estimate," "believe," variations of these words, and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause a difference include, among others: changes in the national and local economies or market conditions; changes in interest rates, deposit flows, loan demand, and asset quality, including real estate and other collateral values; changes in Small Business Administration rules, regulations, or loan products, including the section 7(a) program; changes in other government guaranteed loan programs or our ability to participate in such programs; changes in tax law, including the impact of such changes on our tax assets and liabilities; future governmental shutdowns that may impact revenues associated with our lending and other operations that are dependent on government guaranteed loan programs; changes in banking regulations and accounting principles, policies, or guidelines; the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with the Company’s acquisition and divesture activities or the Company’s planned merger with MVB; the failure of our strategic investments or acquisitions to perform as anticipated and the impact of any impairments to our intangible assets, such as goodwill; the impact of our strategic initiatives, including our planned merger with MVB, on our ability to retain key employees; the possibility that the proposed merger with MVB will not close when expected or at all because required regulatory approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; the possibility that the anticipated benefits of the proposed merger with MVB will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and MVB do business; recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, our strategic initiatives, and regulatory response to these developments; adverse results (including judgments, costs, fines, reputational harm, financial settlements and/or other negative effects) from current or future litigation, regulatory proceedings, investigations, or similar matters, or developments related thereto; and the impact of competition from traditional or new sources, including non-bank financial service providers, such as Fintechs. These, and other factors that may emerge, could cause decisions and actual results to differ materially from current expectations. The Company assumes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.        

Consolidated Balance Sheets
	Ending Balance
(In thousands, unaudited)	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
Assets
Cash and due from banks	$	6,986		$	7,553		$	6,272		$	4,700		$	3,900
Interest-bearing deposits		21,224			26,430			25,011			21,981			28,876
Total cash and cash equivalents		28,210			33,983			31,283			26,681			32,776
Interest-bearing time deposits		999			999			1,249			1,499			1,746
Available-for-sale securities		17,504			17,712			17,460			19,038			20,386
Marketable equity securities		19,980			17,982			17,982			17,982			18,000
Loans held for sale		39,088			34,302			28,399			59,592			51,095
Loans held for investment		319,465			300,764			295,416			266,259			262,281
Allowance for credit losses		(6,011	)		(6,709	)		(6,710	)		(6,361	)		(5,622	)
Loans held for investment, net		313,454			294,055			288,706			259,898			256,659
Premises and equipment, net		4,041			4,098			4,264			4,238			4,235
Foreclosed assets		315			101			-			-			-
Loan servicing assets		3,604			3,715			3,979			4,178			4,014
Bank-owned life insurance		5,053			5,357			5,330			5,304			5,271
Accrued interest receivable		3,090			2,997			2,485			2,139			1,886
Goodwill		13,161			13,161			13,161			13,161			13,161
Other intangible assets, net		5,517			5,682			5,848			6,014			6,180
Other assets		13,243			13,719			17,293			15,764			15,218
Total assets	$	467,259		$	447,863		$	437,439		$	435,488		$	430,627
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing	$	76,554		$	106,255		$	106,272		$	83,544		$	92,499
Interest-bearing		279,735			206,872			218,835			250,026			233,953
Total deposits		356,289			313,127			325,107			333,570			326,452
Borrowings		10,000			30,000			5,000			-			5,000
Accrued interest payable		806			379			370			308			325
Other liabilities		10,101			17,600			23,557			9,939			8,320
Total liabilities		377,196			361,106			354,034			343,817			340,097
Shareholders' equity:
Common stock, voting		2,231			2,239			2,239			2,227			2,213
Common stock, non-voting		22			22			22			22			22
Additional paid in capital		27,742			24,916			24,674			24,498			24,013
Retained earnings		62,965			62,611			60,248			67,781			66,372
Accumulated other comprehensive loss		(2,198	)		(2,301	)		(2,866	)		(1,985	)		(1,296	)
Total IFH, Inc. shareholders' equity		90,762			87,487			84,317			92,543			91,324
Noncontrolling interest		(699	)		(730	)		(912	)		(872	)		(794	)
Total shareholders' equity		90,063			86,757			83,405			91,671			90,530
Total liabilities and shareholders' equity	$	467,259		$	447,863		$	437,439		$	435,488		$	430,627

Consolidated Statements of Income
(In thousands except per	Three Months Ended
share data; unaudited)	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
Interest income
Loans	$	6,997		$	6,422		$	5,943		$	5,491		$	5,623
Available-for-sale securities and other		439			321			274			193			131
Total interest income		7,436			6,743			6,217			5,684			5,754
Interest expense
Interest on deposits		1,696			735			532			523			522
Interest on borrowings		85			93			13			15			9
Total interest expense		1,781			828			545			538			531
Net interest income		5,655			5,915			5,672			5,146			5,223
Provision for credit losses		565			(150	)		320			460			180
Noninterest income
Loan processing and servicing revenue		2,439			2,849			2,163			2,373			2,207
Mortgage		-			99			477			1,066			173
Government guaranteed lending		904			2,095			2,213			2,767			1,124
SBA documentation preparation fees		-			2			78			128			144
Service charges on deposits		133			240			182			118			104
Bank-owned life insurance		555			26			27			33			25
Change in fair value of marketable equity securities		1,998			-			-			-			5,994
Other noninterest income		566			549			222			290			515
Total noninterest income		6,595			5,860			5,362			6,775			10,286
Noninterest expense
Compensation		5,581			6,168			6,880			6,271			7,061
Occupancy and equipment		344			303			402			254			344
Loan and special asset expenses		293			57			969			491			638
Professional services		448			676			207			491			551
Data processing		265			272			263			271			249
Software		469			467			460			426			425
Communications		78			83			86			97			83
Advertising		248			211			252			321			214
Amortization of intangibles		166			169			170			170			170
Merger related expenses		116			192			561			-			-
Other operating expenses		489			1,236			10,683			846			631
Total noninterest expense		8,497			9,834			20,933			9,638			10,366
Income (loss) before income taxes		3,188			2,091			(10,219	)		1,823			4,963
Income tax expense (benefit)		778			(454	)		(2,646	)		492			1,403
Net income (loss)		2,410			2,545			(7,573	)		1,331			3,560
Noncontrolling interest		58			182			(40	)		(78	)		(2	)
Net income (loss) attributable to IFH, Inc.	$	2,352		$	2,363		$	(7,533	)	$	1,409		$	3,562
Basic earnings (loss) per common share	$	1.06		$	1.08		$	(3.45	)	$	0.65		$	1.65
Diluted earnings (loss) per common share	$	1.04		$	1.04		$	(3.45	)	$	0.63		$	1.59
Weighted average common shares outstanding		2,211			2,194			2,185			2,175			2,159
Diluted average common shares outstanding		2,265			2,267			2,185			2,244			2,242

Performance Ratios
	Three Months Ended
	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
PER COMMON SHARE
Basic earnings (loss) per common share	$	1.06		$	1.08		$	(3.45	)	$	0.65		$	1.65
Diluted earnings (loss) per common share		1.04			1.04			(3.45	)		0.63			1.59
Book value per common share		40.28			38.69			37.29			41.15			40.86
Tangible book value per common share (2)		31.99			30.36			28.88			32.62			32.21
FINANCIAL RATIOS (ANNUALIZED)
Return on average assets		2.07	%		2.15	%		-6.97	%		1.29	%		3.30	%
Return on average common shareholders' equity		10.77	%		11.05	%		-33.95	%		6.23	%		15.97	%
Return on average tangible common equity (2)		13.67	%		14.23	%		-43.36	%		7.91	%		20.36	%
Net interest margin		5.85	%		6.35	%		6.22	%		5.51	%		5.69	%
Efficiency ratio (1)		69.4	%		83.5	%		189.7	%		80.8	%		66.8	%
(1) Efficiency ratio is calculated by dividing noninterest expense less transaction-related costs by the sum of net interest income and noninterest income, less gains or losses on sale of securities.
(2) See reconciliation of non-GAAP measures

Loan Concentrations

The top ten commercial loan concentrations as of March 31, 2023, were as follows:

				% of
				Commercial
(Dollars in millions)	Amount			Loans
Solar electric power generation	$	72.5		32	%
Power and communication line and related structures construction		57.3		26	%
Lessors of nonresidential buildings (except miniwarehouses)		15.4		7	%
Other activities related to real estate		10.7		5	%
Lessors of other real estate property		8.2		4	%
Hotels (except casino hotels) and motels		7.1		3	%
Lessors of residential buildings and dwellings		6.4		3	%
Other heavy and civil engineering construction		4.2		2	%
Marinas		3.8		2	%
Colleges, Universities, and Professional Schools		3.5		2	%
	$	189.1		86	%

Reconciliation of Non-GAAP Measures

	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
	(Dollars in thousands except book value per share)
Tangible book value per common share
Total IFH, Inc. shareholders' equity	$	90,762		$	87,487		$	84,317		$	92,543		$	91,324
Less: Goodwill		13,161			13,161			13,161			13,161			13,161
Less Other intangible assets, net		5,517			5,682			5,848			6,014			6,180
Total tangible common equity	$	72,084		$	68,644		$	65,308		$	73,368		$	71,983
Ending common shares outstanding		2,253			2,261			2,261			2,249			2,235
Tangible book value per common share	$	31.99		$	30.36		$	28.88		$	32.62		$	32.21
	Three Months Ended
(Dollars in thousands)	3/31/23			12/31/22			9/30/22			6/30/22			3/31/22
Return on average tangible common equity
Average IFH, Inc. shareholders' equity	$	88,574		$	84,831		$	88,043		$	90,721		$	90,441
Less: Average goodwill		13,161			13,161			13,161			13,161			13,161
Less Average other intangible assets, net		5,625			5,791			5,958			6,123			6,341
Average tangible common equity	$	69,788		$	65,879		$	68,924		$	71,437		$	70,939
Net income (loss) attributable to IFH, Inc.	$	2,352		$	2,363		$	(7,533	)	$	1,409		$	3,562
Return on average tangible common equity		13.67	%		14.23	%		-43.36	%		7.91	%		20.36	%

Contact: Steve Crouse, 919-861-8018