KBRA Assigns Ratings to MidWestOne Financial Group, Inc.
Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Iowa City, Iowa-based MidWestOne Financial Group, Inc. (NASDAQ: MOFG) ("MidWestOne" or "the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for its subsidiary, MidWestOne Bank. The Outlook for all long-term ratings is Stable.
KBRA positively views the diversification efforts in recent years-with management effectively expanding its footprint, business lines, and loan book through M&A and team lift outs. These efforts have helped facilitate improved operating leverage-with MOFG's core ROA tracking above the peer average in recent quarters (1.40%-1.50% range in 3Q 2019 & 4Q 2019 prior to the COVID-19 crisis). However, KBRA notes that earnings have benefited from a considerable amount of purchase accounting accretion income (contributing 37 bps to NIM in 2019). MOFG's comparatively diverse earnings streams are also a strength, which are primarily derived from more stable fee-generating sources, including a growing trust/wealth management business. Additionally, KBRA acknowledges the strong core deposit franchise and management's conservative stance with liquidity management as credit positives. The loan-to-deposit ratio has been managed prudently, which has resulted in a higher level of on-balance sheet liquidity and has helped sustain below average deposit costs.
The management team has constructed the loan portfolio to be relatively diverse as well, although COVID-19 Phase-1 exposures are above average, primarily due to the company's concentration in agricultural lending (9% of total loans). Agricultural borrowers were under pressure prior to this downturn, which has resulted in above peer NPA (News - Alert) and NCO levels leading into the COVID-19 crisis. With that said, management has adequately reserved against problem credits and overall LLR levels are well above average. Moreover, MidWestOne's below peer risk-based capital ratios are a moderate concern, although these are, in part, offset by a comfortable core capital position and the company's sound capital stress testing results.
KBRA continues to monitor the potential direct and indirect effects of the coronavirus on the banking sector, among others. Please refer to our publication U.S. Bank 1Q 2020 Ratings Compendium for our latest thoughts.
The ratings are based on KBRA's Bank & Bank Holding Company Global Rating Methodology published on October 16, 2019.
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
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