MVB Financial Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.
Business context
MVB is a West Virginia-based financial holding company operating community and commercial banking, mortgage banking, and fintech-related businesses. It acquired regulatory compliance firm Chartwell Compliance on September 13, 2019, expanding services to fintech companies and banks.
Financial performance
- Third quarter: Net income was $4.33 million versus $3.58 million in Q3 2018; diluted EPS was $0.35 versus $0.29. Net interest income increased to $15.03 million from $13.52 million, while noninterest income rose to $14.70 million from $10.51 million. Noninterest expense increased to $23.38 million from $18.42 million.
- First nine months: Net income was $22.90 million versus $9.00 million; diluted EPS was $1.88 versus $0.77. Continuing-operations net income was $22.47 million. Net interest income increased to $43.54 million from $37.64 million, and noninterest income increased to $49.85 million from $30.35 million. Noninterest expense rose to $62.22 million from $54.41 million.
- Key earnings driver: Nine-month noninterest income included a $13.77 million unrealized holding gain on equity securities, primarily attributed by management to a fintech investment valuation. This was a major contributor to the year-over-year earnings increase. Mortgage fee income was also higher, at $28.03 million versus $24.63 million.
- Net interest margin: 3.42% in Q3, compared with 3.43% a year earlier; 3.45% for the nine months, compared with 3.37%. Management cited loan growth and higher loan yields, partly offset by higher deposit and borrowing costs.
- Balance sheet at September 30: Assets were $1.962 billion, up from $1.751 billion at December 31, 2018. Gross loans were $1.382 billion versus $1.304 billion; deposits were $1.456 billion versus $1.309 billion. Stockholders’ equity was $206.2 million versus $176.8 million.
- Liquidity and cash flow: Cash and cash equivalents were $36.6 million, up from $22.2 million at year-end. Nine-month operating cash flow was negative $65.8 million, investing cash flow was negative $74.6 million, and financing cash flow was positive $154.7 million. Mortgage loan originations and sales materially affect operating cash flows.
- Funding and debt: FHLB and other borrowings totaled $241.6 million, repurchase agreements $9.5 million, and subordinated debt $4.1 million. The company redeemed $12.4 million and converted $1.0 million of subordinated debt during the nine months. Deposits grew by $147.3 million; noninterest-bearing deposits were $275.0 million.
- Capital and asset quality: Equity-to-assets was 10.51%. The Bank’s total risk-based capital ratio was 12.62%, down from 13.29% at December 31, 2018; management said the Bank was well-capitalized. The allowance for loan losses was $11.9 million, or 0.86% of loans. Nonperforming loans were $5.6 million, or 0.41% of loans, versus $12.8 million, or 0.99%, at September 30, 2018.
Material changes and unusual items
- Q3 efficiency ratio increased to 78.64% from 76.63%; the nine-month ratio improved to 66.63% from 80.02%, with management noting that the equity-securities holding gain particularly affected the year-to-date comparison.
- Salary and benefits expense rose by $6.0 million for the nine months, reflecting mortgage production growth and expansion of the fintech team. Headcount was 420 full-time equivalents, up from 395 a year earlier.
- Special Mention loans increased to $24.3 million from $11.2 million at year-end, and Substandard loans increased to $20.3 million from $12.4 million. Management identified commercial borrower exposures among the drivers, including coal-related equipment lending and senior-care facilities.
- Chartwell acquisition consideration was $4.11 million, including $3.08 million cash and $1.03 million in MVB shares; $1.15 million of goodwill was recorded. Additional contingent consideration may be payable if specified future conditions are met.
- The company adopted lease accounting on January 1, 2019, recognizing $12.9 million of right-of-use assets and $15.7 million of lease liabilities at adoption. At September 30, lease liabilities were $15.3 million.
- Nine-month discontinued-operations income of $0.43 million reflected a $0.575 million earn-out payment received from the 2016 sale of substantially all MVB Insurance assets.
Outlook, risks, and contingencies
Management identified margin improvement, leveraging capital, organic loan growth, and operating efficiency as priorities. It plans to focus on attracting core deposits and expanding treasury services for financial and emerging-technology companies. No quantitative earnings or revenue guidance was provided.
Management cited interest-rate, credit, deposit-funding, competition, economic, technology, regulatory, and acquisition-integration risks. Its interest-rate model, using June 30, 2019 assumptions, projected a 3.2% increase in net interest income from an immediate 100-basis-point rate rise, a 5.7% increase from a 200-basis-point rise, and a 9.1% decrease from a 100-basis-point decline over 12 months; actual outcomes may differ. Management reported no material change in market risk since year-end and no known legal matters expected to materially adversely affect results. The company was evaluating CECL; the filing noted that adoption could potentially have a material impact, with a proposed effective-date delay for smaller reporting companies then pending finalization.
Important facts for investors to verify
- How much of nine-month earnings growth depends on the $13.77 million unrealized fintech equity gain, and how that investment is valued and may fluctuate.
- Whether higher funding costs and deposit competition will continue to pressure net interest margin and profitability.
- Developments in criticized commercial loans, including coal-related and senior-care exposures, and the adequacy of reserves as the portfolio grows.
- Chartwell’s post-acquisition performance, integration costs, and any contingent earn-out obligations.
- The final CECL adoption timing and estimated effect on credit-loss reserves and regulatory capital.