MVB Financial Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. MVB is a West Virginia bank holding company whose core businesses are commercial and retail banking and mortgage banking. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $10.7 | $9.0 | $32.2 | $25.0 |
| Provision for loan losses | $1.1 | $0.6 | $3.0 | $1.9 |
| Noninterest income | $12.5 | $8.5 | $33.1 | $27.9 |
| Noninterest expense | $18.7 | $14.8 | $52.4 | $43.2 |
| Continuing-operations net income | $2.3 | $1.5 | $6.7 | $5.3 |
| Net income, including discontinued operations | $2.3 | $1.4 | $10.6 | $5.4 |
| Diluted EPS, including discontinued operations | $0.24 | $0.16 | $1.08 | $0.60 |
- Margins and returns: Net interest margin was 3.17% for Q3 and 3.22% for the nine months, versus 3.11% and 3.02%, respectively, in 2015. The Q3 efficiency ratio improved to 80.58% from 84.46%. Continuing-operations annualized ROA and ROE were 0.64% and 7.32% for Q3; nine-month figures were 0.62% and 7.41%.
- Balance sheet at September 30: Assets were $1,468.6, up $84.1 from year-end 2015; loans were $1,076.1, up $43.9; deposits were $1,126.8, up $114.5; and stockholders’ equity was $125.4, up $10.7.
- Liquidity and cash flow: Cash and cash equivalents were $28.8, compared with $29.1 at year-end. Nine-month operating cash flow was negative $8.5 (versus positive $5.1 in 2015), investing cash flow was negative $57.7 (versus negative $130.1), and financing cash flow was positive $65.9 (versus positive $120.0). Management cited deposit growth, available-for-sale securities, loan and investment maturities, and borrowing access as liquidity sources.
- Debt and capital: At September 30, repurchase agreements were $27.2, FHLB and other borrowings $136.1, and subordinated debt $33.5. Bank capital ratios were 11.53% Tier 1 and CET1, 12.30% total risk-based capital, and 9.60% leverage. The Bank reported ratios above the filing’s “well capitalized” thresholds.
Material changes and notable items
- Q3 continuing-operations income rose to $2.3 from $1.5, supported by higher net interest income, mortgage fees, and derivative gains; expense growth and a larger loan-loss provision partly offset the increases. Nine-month continuing income rose to $6.7 from $5.3.
- Nine-month total net income included $3.9 of after-tax income from discontinued operations, principally the June 2016 sale of substantially all MVB Insurance assets to USI. The transaction generated a $6.9 pretax gain; MVB retained its immaterial title-insurance business. Consequently, total net income and EPS are not directly comparable without separating the sale-related and other discontinued-operation results.
- Loans grew, while the allowance for loan losses rose to $9.2, or 0.85% of loans, from $8.0, or 0.78%, at year-end 2015. The nine-month provision increased to $3.0 from $1.9. Management attributed credit costs in part to commercial loan impairments, charge-offs, and updated qualitative loss factors.
- The company reclassified $52.4 of held-to-maturity securities to available-for-sale in Q1 following a change in its rationale related to Basel III capital treatment. No held-to-maturity securities remained at September 30. Nine-month securities-sale gains were $1.1.
Outlook, risks, and contingencies
- No quantified earnings or growth guidance was provided. Management identified priorities including margin improvement, organic loan growth, operating efficiency, and attracting core deposits to fund expansion. It reported strong commercial and retail loan production and continued investment in mortgage staffing, locations, technology, and compliance capacity.
- Management noted competitive pressure on loan yields and the challenge of deposit gathering. Principal disclosed risks include interest-rate and market changes, credit quality and real-estate conditions, competition, regulatory and capital requirements, technology and cybersecurity, and successful execution and integration of business plans.
- Credit exposure warrants attention: commercial loans were 69.7% of the loan portfolio. Nonperforming loans were 0.95% of total loans; coal and natural-gas production loans totaled $7.2. Management described problem credits including commercial real-estate development and coal-related loans. It reported impaired loans of $11.8 and troubled debt restructurings of $8.4, including $2.6 of restructured loans in default.
- Management’s June 30 interest-rate model projected 12-month net interest income changes of +3.22% under an immediate 100-basis-point rate increase, +5.95% under a 200-basis-point increase, and −5.92% under a 100-basis-point decrease. These are model estimates based on stated assumptions, not forecasts.
- The filing reports ordinary-course legal matters but says management and counsel do not expect a significant adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the USI sale gain and other discontinued-operation results.
- Track mortgage production, loan-sale margins, derivative valuation gains, and the sustainability of mortgage-related revenue.
- Monitor criticized, nonperforming, impaired, and restructured loans; charge-offs; and allowance adequacy, particularly commercial real-estate and coal-related exposures.
- Assess deposit mix and funding costs against loan growth, FHLB borrowing levels, and available liquidity.
- Review the effects of preferred dividends, including the SBLF preferred dividend rate increase to 9% in March 2016, and potential dilution from convertible preferred stock and subordinated debt.
- Consider that the filing’s interim results are unaudited and management stated they are not necessarily indicative of full-year results.