MVB Financial Corp. — Q3 2022 Form 10-Q
Business context and period. MVB is a West Virginia financial holding company operating through MVB Bank and banking, mortgage, professional-services and fintech businesses. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $29.8 million | $19.1 million | $78.4 million | $55.7 million |
| Noninterest income | $8.2 million | $22.0 million | $32.0 million | $48.1 million |
| Noninterest expense | $30.0 million | $25.8 million | $88.6 million | $68.4 million |
| Net income available to common shareholders | $2.7 million | $11.8 million | $8.5 million | $29.1 million |
| Diluted EPS | $0.21 | $0.92 | $0.66 | $2.32 |
| Tax-equivalent net interest margin | 4.25% | 3.25% | 3.84% | 3.25% |
| Efficiency ratio | 78.8% | 62.9% | 80.4% | 65.9% |
- Balance sheet: Total assets were $3.14 billion, loans receivable $2.47 billion, deposits $2.70 billion and stockholders’ equity $244.4 million at September 30, 2022. Loans grew $601.6 million and deposits $319.4 million from year-end 2021.
- Credit: The allowance for loan losses was $26.5 million, or 1.07% of loans, versus $18.3 million, or 0.98%, at year-end. Nonperforming loans were $22.4 million, or 0.9% of loans, compared with $17.5 million, or 1.0%, at September 2021. Nine-month net charge-offs were $3.3 million, versus $0.1 million a year earlier; the filing says substantially all charge-offs related to subprime consumer auto loans.
- Cash flow and liquidity: Nine-month operating cash flow was $3.8 million, investing cash flow was negative $617.4 million and financing cash flow was positive $386.1 million. Cash and cash equivalents fell to $79.9 million from $307.4 million at year-end. Deposit growth and new FHLB borrowing helped fund balance-sheet expansion. The Bank reported $73.3 million of short-term FHLB borrowings and $239.8 million of remaining FHLB borrowing capacity.
- Debt and capital: FHLB and other borrowings totaled $73.3 million; subordinated debt was $73.2 million. The Bank’s Community Bank Leverage Ratio was 11.1%, above the 9% well-capitalized threshold. Equity to assets was 7.8%, down from 9.5% at September 2021.
- Other comprehensive loss: Nine-month comprehensive loss was $27.8 million, including a $36.4 million after-tax decline in accumulated other comprehensive income, primarily from unrealized losses on available-for-sale securities. The portfolio carried $52.4 million of pretax unrealized losses at quarter-end; management said it intended and expected to be able to hold the securities until principal recovery.
Material changes versus comparable periods
- Net interest income and margin increased year over year, reflecting loan growth and higher asset yields as rates rose. Funding costs also increased: Q3 cost of interest-bearing liabilities was 1.15%, versus 0.39% a year earlier.
- Profit fell sharply despite higher net interest income. Q3 and nine-month earnings declined primarily amid lower noninterest income and higher expenses/provision. Prior-year comparisons included a $10.8 million acquisition/divestiture gain in Q3 2021; nine-month noninterest income also benefited from higher mortgage-related equity-method income and securities gains.
- Noninterest expense rose with hiring and investment in revenue generation, technology, compliance and risk management. Average full-time-equivalent employees increased 30% in the first three quarters of 2022 versus the prior-year period.
- The securities portfolio’s fair value fell to $366.7 million from $421.5 million at year-end, principally reflecting market-value declines. Noninterest-bearing deposits increased to $1.41 billion from $1.12 billion and represented 52.3% of deposits.
Outlook, transactions and risks
- No numerical earnings or financial guidance is provided. Management says it is focused on margin improvement, loan growth, use of low-cost deposits, operating efficiency, fintech fee income and continued investment in compliance and risk capabilities.
- The Federal Reserve’s target rate was 3.00%–3.25% at September 30 and rose to 3.75%–4.00% effective November 3, 2022. Management cited rising rates, inflation and possible recession as factors affecting credit, funding costs and operations.
- Management expects adoption of CECL in 2023 and currently estimates a 15%–25% increase in the allowance for credit losses, excluding any change in the unfunded commitment liability. The ultimate impact remains uncertain.
- In August 2022, MVB agreed to acquire Integrated Financial Holdings in a stock-for-stock merger at 1.21 MVB shares per IFH share. Closing was expected in Q1 2023, subject to shareholder, regulatory and other conditions.
- After quarter-end, on October 1, MVB completed a 37.5% investment in Warp Speed for $38.4 million cash plus 313,030 newly issued shares valued at $9.6 million. In October it also borrowed $10 million under a senior term loan bearing interest at 2.75% plus term SOFR.
- Notable risks include deposit concentration, including $885.4 million of gaming deposits, of which $730.5 million was held by the three largest gaming clients; loan and consumer-auto credit quality; interest-rate and securities-value changes; liquidity and funding costs; fintech execution, compliance and cybersecurity. MVB also reported $437.98 million in loans referencing LIBOR, scheduled to transition to SOFR by June 30, 2023.
- The company reported no material change in risk factors, no known legal proceedings expected to have a material adverse effect, and effective disclosure controls as of September 30, 2022.
Important facts for investors to verify
- Whether loan growth and higher net interest margins can offset rising deposit and borrowing costs, and whether those trends persist.
- Credit performance—especially subprime consumer auto loans—along with future charge-offs, delinquency trends and the adequacy of the allowance.
- Liquidity and concentration exposure: changes in large-client, gaming and fintech deposits, and the availability and cost of FHLB or other funding.
- The scale and timing of securities-related capital effects, including unrealized losses and the company’s ability to hold securities as stated.
- Final terms, approvals, funding, integration and financial effects of the IFH merger and Warp Speed investment, including the new term-loan obligations.
- The eventual CECL allowance adjustment and the transition of LIBOR-referenced loans to SOFR.