MVB Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. MVB is a financial holding company operating through MVB Bank, with community and fintech banking, mortgage banking, professional services, and fintech ventures. Financial amounts below are in U.S. dollars; unless otherwise noted, figures are in millions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $26.7 | $19.1 | $48.5 | $36.6 |
| Noninterest income | $11.9 | $13.6 | $23.8 | $26.1 |
| Noninterest expense | $29.8 | $23.4 | $58.7 | $42.5 |
| Provision for loan losses | $5.1 | $(1.5) release | $6.4 | $(0.9) release |
| Net income attributable to parent | $3.0 | $9.2 | $5.8 | $17.3 |
| Diluted EPS | $0.23 | $0.73 | $0.45 | $1.39 |
| Tax-equivalent net interest margin | 4.10% | 3.24% | 3.63% | 3.25% |
Net interest income growth reflected loan growth and higher loan yields, while the Q2 margin also benefited by about 20 basis points from accelerated accretion on PCI loans sold. Earnings fell sharply as expense growth and higher loan-loss provision outweighed improved net interest income. Noninterest income was lower, notably because mortgage-related equity-method income and securities-sale gains declined. Salaries and benefits rose $5.3 million in Q2; average full-time-equivalent employees were up 35% in the first half from the prior-year period. Q2 return on average assets and equity were 0.4% and 4.6%, versus 1.4% and 15.5% a year earlier.
Balance sheet, funding and cash flow
- Total assets were $2.98 billion at June 30, up $192.0 million from year-end 2021. Loans receivable were $2.22 billion, up $350.0 million; deposits were $2.61 billion, up $237.4 million.
- Cash and cash equivalents fell to $161.8 million from $307.4 million. For the first half, operating activities used $10.5 million, investing activities used $368.5 million, and financing activities provided $233.4 million; cash declined $145.7 million.
- Noninterest-bearing deposits were $1.34 billion, or 51.4% of deposits, versus $1.12 billion, or 47.1%, at year-end. Fintech deposits reached $1.42 billion, including $1.01 billion in gaming deposits. One gaming client accounted for $509.7 million.
- Subordinated debt was $73.2 million; repurchase agreements were $11.2 million. There were no FHLB or other long-term borrowings outstanding. The Bank reported $380.7 million of remaining FHLB borrowing capacity.
- Stockholders’ equity was $252.9 million, down $22.4 million from year-end, principally reflecting $25.8 million of after-tax other comprehensive loss, mainly unrealized securities losses. Equity to assets was 8.5%, compared with 9.8% at year-end. The Bank’s Community Bank Leverage Ratio was 11.6%.
Credit quality and other material developments
- The allowance for loan losses was $22.7 million, or 1.03% of loans, versus $18.3 million, or 0.98%, at year-end. First-half net charge-offs were approximately $1.9 million; the filing says substantially all gross charge-offs related to the subprime consumer auto portfolio.
- Nonperforming loans were $19.3 million, or 0.9% of loans, versus $15.5 million a year earlier. Criticized loan balances and borrower performance merit monitoring alongside rapid loan growth.
- Available-for-sale securities had $40.4 million of gross unrealized losses at quarter-end. Management classified the losses as temporary, said it did not intend to sell the securities at those values, and believed it could hold them until principal recovery. A forced sale could crystallize losses.
- MVB had agreed to invest in 37.5% of Warp Speed Holdings for $38.4 million cash plus $9.6 million in MVB shares; closing was expected in Q3 2022. In August, the Bank renewed a program-management agreement with a Credit Karma subsidiary through July 31, 2024.
- Management said loan activity was expected to remain strong in the near term and identified margin improvement, loan growth, use of low-cost deposits, operating efficiency, and compliance management as priorities. The filing gives no quantified earnings or financial guidance.
- Key risks cited include deposit and gaming-client concentration, credit quality and subprime auto exposure, interest-rate and liquidity risk, recession and inflation, fintech execution and compliance, cybersecurity and third-party operations, and COVID-19 uncertainty. Management reported no material change in previously disclosed risk factors, no known legal proceedings expected to materially harm results, and effective disclosure controls.
Important facts for investors to verify
- Whether the expected Warp Speed transaction closed, its final share issuance and funding effects, and subsequent performance.
- Trends in gaming and other fintech deposits, especially the $509.7 million single-client balance, and the company’s liquidity if those balances leave.
- Loan growth composition, delinquency and nonperforming-loan trends, subprime auto charge-offs, and adequacy of the allowance, including the planned CECL adoption in 2023; management could not yet estimate CECL’s effect.
- Whether securities unrealized losses recover or require sales, and the impact of further rate changes on net interest margin, deposits and capital.
- Whether expense growth, mortgage-related income declines and fintech investments improve sufficiently to restore earnings and operating efficiency.