IFHI - Integrated Financial Holdings Inc. Third Quarter 2023 Financial Results

RALEIGH, N.C., Oct. 26, 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 and nine months ended September 30, 2023. Highlights from the 2023 third quarter results include the following:

• Third quarter net income of $2.4 million, or $1.06 per diluted share compared to a third quarter 2022 net loss of $7.5 million, or $(3.45) per diluted share. Year-to-date net income of $8.3 million or $3.69 per diluted share compared to a net loss of $2.6 million or $(1.18) per diluted share in the prior year.
• Net interest income of $5.6 million for the third quarter of 2023, compared to $5.7 million for the same period in 2022. For the year, net interest income was $16.8 million compared to $16.0 million for the same nine-month period in 2022.
• Return on average assets of 1.97% and 2.36% for the three and nine-month periods ending September 30, 2023, compared to -6.97% and -0.79% for the same periods in 2022.
• Return on average tangible common equity (a non-GAAP financial measure) of 12.38% and 15.26% for the three and nine-month periods ending September 30, 2023, compared to -43.36% and -4.86% for the same periods in 2022.

The third quarter of 2023 showed positive results from a continued effort to improve efficiency as the Company continues to streamline operations and reduce overhead costs. The efficiency ratio in the third quarter of 2023 was 69.6% compared to 189.7% for the same period in 2022. It should be noted that the 2022 third quarter was materially impacted by a $10.0 million litigation expense, which was disclosed in detail in the Company’s second quarter 2022 earnings release. Excluding the $10.0 million litigation expense in 2022, third quarter 2023 noninterest expenses were still an improvement of $3.5 million period over period. Total noninterest expense was down $16.9 million or 41% from 2022 to 2023 resulting in an efficiency ratio of 66.5% for the nine months ended September 30, 2023, compared to 106.4% for the same period in 2022. Excluding the 2022 litigation expense, noninterest expenses for the nine-month period ended September 30, 2022 would have been $30.9 million and the efficiency ratio would have been 80.4% for an improvement in 2023 of $6.9 million or 22%.

In reflecting on the third quarter of the year, Marc McConnell, Chairman, President, and CEO of IFHI, stated: “We are excited by our strong earnings in the third quarter which are primarily attributable to the continually improving efficiency of our operations and the consistent performance of strategic growth initiatives. Quarter to quarter, our efficiency ratio continues to improve as recurring expenses decrease and recurring non-interest income remains steady. The approximately 2% return on average assets and the consistency of these trends is even more encouraging within the context of this year’s turbulent economic environment, particularly for government-guaranteed financing as interest rates fluctuate. Our ability to steadfastly improve earnings performance in light of external challenges reinforces confidence in this year’s strategic plan to right-size the company. With the end of the year approaching, we remain focused on maintaining a sustainable trajectory for continued growth while increasing shareholder value in the new year and beyond.”

BALANCE SHEET
On September 30, 2023, the Company’s total assets were $499.2 million, net loans held for investment were $340.7 million, loans held for sale (“HFS”) were $37.9 million, total deposits were $392.4 million and total shareholders’ equity attributable to IFHI was $96.4 million. Compared with December 31, 2022, total assets increased $51.3 million or 11%, net loans held for investment increased $46.7 million or 16%, HFS loans increased $3.6 million or 10%, total deposits increased $79.2 million or 25%, and total shareholders’ equity attributable to IFHI increased $8.9 million or 10%. Cash and cash equivalents decreased $218,000 or 1% since the prior year-end. 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. Noninterest bearing deposits have decreased by $21.4 million or 23% 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 earnings. The market value of the available-for-sale investment portfolio has decreased by $674,000 since year end as a result of changing rate expectations with the accumulated other comprehensive loss component of equity related to the change in market pricing at $2.3 million at December 31, 2022 and $3.0 million at September 30, 2023. The Company does not have any investments in its portfolio treated as held-to-maturity being carried at cost.

CAPITAL AND LIQUIDITY STRENGTH
At September 30, 2023, the regulatory capital ratios of West Town Bank & Trust exceeded the minimum thresholds established for well-capitalized banks under applicable banking regulations.

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 $41.98 at September 30, 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 $33.99 at September 30, 2023, primarily as a result of net income.

Total deposits increased by $79.2 million since December 31, 2022 and by $67.3 million over the past twelve months. The Bank funds its loan growth primarily with a blend of customer deposits and wholesale funding and has a wide variety of customers and industries in its portfolio. The Bank also offers services that provide FDIC coverage for its customers in excess of the $250,000 limit. As of September 30, 2023, the average deposit account size was $100,000, and uninsured deposits excluding those required for debt service were $41.8 million or roughly 11% of total deposits.

The Bank’s primary on-balance sheet liquidity consists of cash and cash equivalents along with unpledged available for sale investment securities, which totaled $49.9 million as of September 30, 2023. Additionally, the Bank maintains fully collateralized credit facilities with the Federal Home Loan Bank of Chicago (“FHLB”) and the Federal Reserve. As of September 30, 2023, the FHLB credit facility had an available borrowing capacity of $53.6 million with no outstanding balance. The Federal Reserve had an available borrowing capacity of $51,000 with no outstanding balance. In addition, the Bank had $18.5 million in additional borrowing capacity with other financial institutions. In aggregate, total primary on-balance sheet liquidity and total available borrowing capacity was 292% of the amount of uninsured deposits (excluding those required for debt service) as of September 30, 2023.

Additionally, the Bank’s business model includes the origination and sale of GGL loans, a process which occurs each month and can be accelerated or slowed down based on the Bank’s current funding needs. At September 30, 2023, the Bank had $37.9 million in loans available for sale, which could generate additional liquidity as needed.

ASSET QUALITY
The Company’s nonperforming assets to total assets ratio increased from 1.04% at December 31, 2022, to 2.87% at September 30, 2023. Nonaccrual loans at September 30, 2023 increased $9.3 million or 205% as compared to December 31, 2022. The increase was primarily related to one relationship for $7.4 million secured by a property with a value of approximately $12.0 million. We believe there is strong secondary support of the guarantors, and the Bank has not reserved against the loan given the estimated value of the collateral securing the loan. The Bank held $101,000 in foreclosed assets as of September 30, 2023 and December 31, 2022.

During the third quarters of 2023 and 2022, the Company recorded provisions for credit losses of $50,000 and $320,000, respectively. The Company recorded $43,000 in net recoveries during the third quarter of 2023 compared to $29,000 in net recoveries for the same period in 2022. Set forth in the table below is certain asset quality information as of the dates indicated:

NET INTEREST INCOME AND MARGIN
Net interest income for the three months ended September 30, 2023, decreased $57,000 or 1% in comparison to the third quarter of 2022 primarily as a result of an increase in cost of funds outpacing the positive impact of growth in average loans outstanding between the two periods. Loan yields increased from 7.55% in the third quarter of 2022 to 8.36% for the same period in 2023. The increase in yield from the prior year reflected the impact of 225 basis points of rate increases by the Federal Open Market Committee (“FOMC”) during that 12-month period in response to current economic conditions, as well as a change in loan mix. Overall cost of funds increased from 0.66% in the third quarter of 2022 to 2.86% 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 declined from 6.62% during the three months ended September 30, 2022, to 5.32% for the same period in 2023; however, the impact of that decrease was lessened by a period-over-period increase in average earning assets of $57.1 million.

For the nine months ended September 30, net interest income increased from $16.0 million in 2022 to $16.8 million in 2023. The increase of $764,000 or 5% was due to an increase in average loan volume slightly offset by a decrease in net interest margin. Average loans increased from $308.7 million for the nine months ended September 30, 2022 to $358.9 million for the same period in 2023. Net interest margin during those same periods decreased from 5.81% in 2022 to 5.54% in 2023.

NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2023, was $5.1 million compared to $5.4 million for the same period in 2022. The decrease is primarily attributable to a lack of mortgage revenues in 2023 as the Company discontinued its mortgage operations in the fourth quarter of 2022 and a decrease in government guaranteed lending revenue quarter-over-quarter. Offsetting these decreases was an increase in the income of Windsor Advantage, LLC (“Windsor”), a subsidiary of the Company.

Specific items to note with respect to the most recently completed quarter include:

• Windsor, which offers an SBA and USDA loan servicing platform, had processing and servicing revenue totaling $2.8 million, an increase of $616,000 or 28% as compared to the $2.2 million in income earned during the same prior-year period.
• Mortgage revenue totaled $477,000 for the third 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 had phased out its mortgage operations by the fourth quarter of 2022.
• Government Guaranteed Lending revenue was $2.0 million in the third quarter of 2023, a decrease of $260,000 or 12% in comparison to the $2.2 million of revenues for the same period in 2022.
  

On a year-to-date basis, noninterest income has decreased $3.0 million or 13%. The decrease is primarily the result of the 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.

NONINTEREST EXPENSE
Noninterest expense for the third quarter of 2023 was $7.4 million, a decrease of $13.6 million or 65%, from $21.0 million for the third quarter of 2022. This change was primarily due to a decrease of $10.0 million or 94% in other operating expenses as a result of the $10.0 million litigation expense recorded in the third quarter of 2022. In addition to that decrease, every other noninterest expense category except professional services was down between the third quarter of 2022 and the same period in 2023 as the Company continues its efforts to decrease its overhead expenses in light of the changing economic environment. Most notably, compensation expense decreased $2.5 million or 36% going from $6.9 million in the third quarter of 2022 down to $4.4 million for the same period in 2023. Compensation expense has decreased in four consecutive quarters.

Loan and special asset related expenses, which tend to fluctuate unexpectedly, also decreased by $305,000 or 31% from $969,000 in the third quarter of 2022 to $664,000 for the same period in 2023.

The result of the decreases in all expense categories was a significant improvement in the efficiency ratio, which decreased from 189.7% during the third quarter of 2022 to 69.6% for the same period in 2023.

On a year-to-date basis, noninterest expenses decreased from $40.9 million for the first nine months of 2022 to $24.1 million for the same period in 2023, a decrease of $16.9 million or 41%. Other operating expenses was the biggest driver in the overall decrease, which declined by $10.6 million period-over-period again reflecting impact of the $10.0 million litigation expense. Compensation expense was the second largest reason for the decrease in total noninterest expenses, declining to $15.4 million in the first nine months of 2023 from $20.2 million in the same period in 2022, a decrease of $4.8 million or 24%.

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? that the value realized upon the sale of any foreclosed assets may be less than anticipated; 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 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 on our ability to retain key employees; 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.

Contact: Steve Crouse, 919-861-8018

Consolidated Balance Sheets

Consolidated Statements of Income

Performance Ratios

Loan Concentrations

The top ten commercial loan concentrations as of September 30, 2023, were as follows:

Reconciliation of Non-GAAP Measures