MVB Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. MVB is a bank holding company with community banking, mortgage, fintech, compliance and fraud-prevention businesses. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $16.0 | $15.0 | $50.6 | $43.5 |
| Provision for loan losses | $8.6 | $0.7 | $16.4 | $1.6 |
| Noninterest income | $19.4 | $14.7 | $75.8 | $49.8 |
| Noninterest expense | $18.3 | $23.4 | $76.3 | $62.2 |
| Net income | $6.5 | $4.3 | $25.6 | $22.9 |
| Diluted EPS | $0.53 | $0.35 | $2.07 | $1.88 |
Nine-month continuing-operations net income was $25.6 million versus $22.5 million in 2019; 2019 total net income included $0.4 million from discontinued operations. Q3 and nine-month 2020 diluted EPS from continuing operations were $0.53 and $2.07, versus $0.35 and $1.84, respectively.
Net interest margin was 3.29% GAAP (3.35% fully tax-equivalent) in Q3, compared with 3.42% (3.48%) a year earlier. For the nine months, it was 3.54% GAAP (3.60% fully tax-equivalent), versus 3.45% (3.51%). Q3 efficiency ratio was 51.58%, versus 78.64%; nine-month ratio was 60.33%, versus 66.63%.
Operating cash flow was $91.3 million for the nine months, compared with cash used of $65.8 million in 2019. Investing activities used $154.7 million and financing activities provided $331.2 million. Cash and cash equivalents ended the period at $295.8 million.
Financial position, debt and credit
- Total assets were $2.21 billion, up $270.3 million from year-end 2019. Net loans were $1.40 billion; available-for-sale securities were $298.0 million.
- Deposits rose to $1.90 billion from $1.27 billion, including noninterest-bearing deposits of $642.8 million. Management attributed significant noninterest-bearing balances to fintech relationships and title-business funds.
- FHLB and other borrowings were $25.8 million, down from $222.9 million at year-end; short-term borrowings were zero. Repurchase agreements were $10.0 million and subordinated debt $4.1 million. The Bank reported more than $488 million of additional FHLB borrowing capacity.
- Stockholders’ equity was $234.1 million; equity-to-assets was 10.57%. Bank regulatory ratios included a 14.63% CET1 ratio, 15.89% total risk-based capital ratio and 10.64% leverage ratio. The filing says the Company was well-capitalized.
- Allowance for loan losses increased to $25.9 million, or 1.81% of loans, from $11.8 million, or 0.86%, at year-end. Nonperforming loans were $14.9 million (1.04% of loans), versus $5.6 million (0.41%) in the prior-year comparison.
- Commercial loans, including acquired First State commercial loans, represented 79.6% of the loan portfolio. Criticized balances increased materially: Special Mention loans were $48.6 million and Substandard loans $65.8 million at September 30, 2020.
Material changes and unusual items
- Q3 provision expense rose to $8.6 million. Management said enhancements to COVID-related qualitative credit factors added $6.6 million of Q3 provision; risk-rating changes and portfolio factors also contributed. Nine-month provision rose to $16.4 million.
- Q3 noninterest income benefited from $13.6 million of equity-method investment income and a $3.3 million mortgage-combination gain, while derivative gains and mortgage fee income declined. Nine-month results also included a $9.6 million gain from the sale of four branches and a $4.7 million bargain-purchase gain from the First State acquisition. These items make reported income comparisons less representative of recurring performance.
- On July 1, MVB combined its mortgage origination operations with Intercoastal Mortgage. MVB received a 47% common interest and $7.5 million of preferred units and accounts for the investment under the equity method. The reported investment was $39.3 million at quarter-end.
- The FDIC-assisted First State acquisition closed April 3, bringing deposits, loans and three branches. The company also acquired Paladin and Grand Software. It sold four Eastern Panhandle branches in April, exiting that market.
- The company repurchased 128,024 shares for $1.9 million during 2020 and extended authorization for up to $5.0 million of repurchases over 12 months.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management identified margin improvement, capital leverage, organic loan growth and operating efficiency as priorities, alongside core-deposit growth and fintech-related deposit and fee-income initiatives. Given its asset-sensitive position and the lower rate environment, management expected net interest income to decline. Its June 2020 rate model estimated a 5.9% decrease in 12-month net interest income from an immediate 100-basis-point rate decline, and increases of 6.4% and 12.3% from immediate 100- and 200-basis-point increases, respectively; actual results may differ.
COVID-19 impacts remained uncertain. Management cited increased borrower stress, higher unemployment, possible loan-payment disruptions and the potential for further credit deterioration. At quarter-end, $41.1 million of commercial loans and $15.7 million of mortgage loans had approved payment modifications; these were not classified as troubled debt restructurings. MVB originated 455 PPP loans totaling $92.8 million, with $87.9 million outstanding. The filing identifies potential PPP litigation and the risk that SBA guarantees could be denied or reduced if program requirements were not met.
Management said it was maintaining elevated liquidity and had not yet fully quantified the pandemic’s financial impact. The company expects to adopt CECL in January 2023 as a smaller reporting company; the eventual allowance and capital effects were not yet estimable. Management and counsel did not expect ordinary-course legal matters to have a significant adverse effect. Disclosure controls were assessed as effective, with no material Q3 change in internal control over financial reporting.
Key facts for investors to verify
- Whether elevated provision expense, rising criticized/nonperforming loans and commercial-real-estate and hospitality exposures lead to further credit losses.
- How much reported earnings depend on the mortgage combination, First State bargain gain, branch-sale gain and other nonrecurring or fair-value items.
- Whether deposits—particularly fintech-related balances—remain stable, and how excess liquidity and low rates affect net interest income and margin.
- Performance and cash distributions from the Intercoastal equity-method investment, including the sustainability of reported investment income.
- PPP loan forgiveness and SBA guarantee compliance, and the eventual economic, CECL and pandemic-related effects on credit quality and capital.