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Positive earnings estimate revisions on the back of strong second quarter results – including a 17.1% year-over-year earnings growth – have helped MidWest One Financial Group, Inc. (MOFG - Snapshot Report) achieve a Zacks #1 Rank (Strong Buy) on September 26. To date, this retail banking service provider has increased dividend twice in the current year.   

With a solid year-to-date return of 50.8% and a history of paying quarterly dividends throughout the financial crisis, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second quarter earnings, decent loan growth and fundamental strength – including sturdy credit quality and dividend increases – are the primary rank drivers for this stock.

MidWest One Financial reported its second quarter results on July 26 with earnings per share of 41 cents, beating the year-ago earnings of 35 cents by 17.1%, though it lagged the Zacks Consensus Estimate by a penny. Results for the reported quarter were primarily aided by higher non-interest income, elevated net interest income and reduced provision for loan losses.

Net interest income augmented 8.2% to $13.2 million from $12.2 million in the year-ago quarter. The rise was primarily due to lower interest expenses. Net interest margin expanded 12 basis points to 3.45%. The upsurge was mainly attributed to significant decrease in average rate paid on interest-bearing liabilities.

Non-interest income more than doubled to $8.2 million from $3.3 million recorded in the prior-year quarter. Provision for loan losses skidded 33.3% from the year-ago quarter to $0.6 million.

However, on the downside, non-interest expense escalated 61.2% year over year to $16.6 million. Elevated salaries and benefits expense led to the rise in non-interest expenses.

Credit quality continues to exhibit improvement. Nonperforming loans were $12.2 million, sliding 32.6% from $18.1 million as of June 30, 2011. Net charge-offs for the quarter were $1.1 million compared with $1.4 million in the year-ago quarter.    

As of June 30, 2012, MidWest One Financial's tangible common equity to tangible assets was 9.2% and Tier 1 capital to average assets was 9.6%. Book value per share came in at $19.67 versus $19.54 in the year-ago quarter.

In July 2012, MidWest One Financial announced increased third quarter cash dividend of 9.5 cents per share, indicating a 12% increase from the prior dividend of 8.5 cents. The dividend was paid on September 15, 2012 to shareholders of record at the close of business on September 1, 2012. The current dividend rate implies an annual dividend yield of 1.7%.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 3.7% to $1.95 per share over the last 60 days. The current estimate implies a year-over-year growth of 32.7%. For 2013, over the same time frame, the Zacks Consensus Estimate surged 4.6% to $2.05 per share, indicating a year-over-year growth of 5.3%.

Attractive Valuation

MidWest One Financial currently trades at a forward P/E of 11.4x, a 3.4% discount to the peer group average of 11.8x. On a price-to-book basis, the shares are trading at 1.1x, in line with the peer group average. Given the company's strong fundamentals, the valuation looks attractive.

MidWest One Financial has a trailing 12-month ROE of 9.5%, compared with the peer group average of 9.3%.

About the Company

Headquartered in Iowa City, Iowa, MidWest One Financial is a bank holding company. It operates through 25 traditional branches, a specialized home loan center in central and east-central Iowa, and 46 ATMs through its subsidiary – MidWestOne Bank, which offers an array of retail banking services. The company has a market capitalization of roughly $186.6 million.

1st Enterprise Bank is also a Zacks #1 Rank bank stock.

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