MVB Financial Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and reporting period
MVB is a financial holding company whose activities include community and retail banking, mortgage-related investments, and financial technology businesses. The filing reports consolidated results and unaudited interim financial statements. In 2021, MVB expanded its Fintech operations, acquired 80% interests in Flexia and Trabian, and sold four West Virginia banking centers. Its mortgage business is reflected principally through its equity-method investment in Intercoastal Mortgage Company (ICM).
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net interest income | $19.1 | $16.0 | $55.7 | $50.6 |
| Noninterest income | $22.0 | $19.4 | $48.1 | $75.8 |
| Noninterest expense | $25.8 | $18.3 | $68.4 | $76.3 |
| Net income attributable to parent | $11.8 | $6.5 | $29.2 | $25.6 |
| Diluted EPS | $0.92 | $0.53 | $2.32 | $2.07 |
| Tax-equivalent net interest margin | 3.25% | 3.35% | 3.25% | 3.60% |
At September 30, 2021, total assets were $2.79 billion, loans net of allowance were $1.74 billion, and deposits were $2.40 billion. Cash and cash equivalents were $390.1 million. Stockholders’ equity was $266.7 million; the equity-to-assets ratio was 9.5%. The Bank’s Community Bank Leverage Ratio was 12.0%, above the stated 8.5% well-capitalized threshold.
For the first nine months, operating cash flow was $11.8 million, investing cash outflow was $488.0 million, and financing cash inflow was $602.4 million. Cash increased by $126.2 million to $390.1 million. Deposits funded 96.6% of funding sources. Subordinated debt was $73.0 million, including $30 million issued in September; there were no FHLB or other borrowings outstanding at quarter-end. The Bank reported $443.0 million of remaining FHLB borrowing capacity.
Credit indicators included a $25.2 million allowance for loan losses, equal to 1.4% of total loans, and $17.5 million of nonperforming loans, or 1.0% of loans. Net charge-offs were $0.1 million for the nine-month period. TDRs totaled $7.7 million; $2.6 million of loans to two borrowers had defaulted under restructured terms and were nonperforming.
Material changes versus comparable periods
- Q3 net interest income rose 19.3%, supported by higher average earning assets and lower funding costs. The tax-equivalent margin nevertheless declined 10 basis points year over year. For the nine months, net interest income rose 9.9%, while the margin fell 35 basis points.
- Q3 noninterest income included a $10.8 million pretax gain on the banking-center sale. Q3 expense rose $7.6 million, including higher personnel and professional costs associated with Fintech investment.
- For the nine months, noninterest income fell $27.7 million, mainly because mortgage fee income declined $33.4 million following the 2020 ICM combination. This shift in business structure makes reported noninterest income less directly comparable year over year.
- Loans grew $310.4 million from December 2020, while deposits increased $416.6 million. Noninterest-bearing deposits rose to $999.3 million, or 41.7% of deposits. Fintech deposits reached $975.7 million, including $774.1 million in gaming deposits.
- The allowance for loan losses declined from $25.8 million at year-end 2020; the nine-month provision was a $0.5 million release. The filing cites improved qualitative allowance factors, while also noting borrower stress and uncertainty about the eventual effects of COVID-19.
Outlook, commentary, risks and unusual items
Management said it would focus on margin improvement, lending growth, operating efficiency, core deposit gathering, and expansion of treasury services and Fintech capabilities. It anticipated strong near-term loan activity and expected Fintech deposits to continue growing. The filing provides no specific numerical earnings or revenue guidance.
Management noted that low interest rates, competitive pricing, and the company’s asset-sensitive position were pressuring net interest income; an eventual upward shift in Treasury yields was expected as the pandemic outlook improved, but timing and effects were uncertain. Other cited risks include COVID-19 and economic conditions, inflation, credit quality and loan concentrations, interest-rate and liquidity risks, reliance on large customers and Fintech/gaming deposits, execution and integration of Fintech investments, cybersecurity and operational risks, and the LIBOR-to-alternative-rate transition.
Unusual and material items include the $10.8 million gain on sale of four banking centers; the $30 million subordinated-note issuance, with a 3.25% fixed coupon for five years followed by a floating rate; and redemption of all preferred stock in January 2021. MVB expects to adopt CECL for fiscal years beginning after December 15, 2022; it had not estimated the adoption impact. Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported Q3 earnings and future profitability depends on the one-time banking-center sale gain, and how recurring Fintech and service-fee income develops.
- Whether the rapid growth and concentration of Fintech, particularly gaming, deposits is sustainable and how sensitive it is to large customers and industry changes.
- Whether loan growth, criticized and nonperforming loans, TDR defaults, and the allowance remain consistent with the company’s credit-risk assumptions.
- Whether net interest margin stabilizes or declines further as asset yields, deposit mix, rates, and PPP loan balances change.
- The earnings contribution and valuation risks of ICM and other Fintech investments, and the costs and results of integrating acquired businesses.
- The eventual CECL transition adjustment, as well as the terms and future benchmark-rate exposure of subordinated debt.