MVB Financial Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. MVB is a financial holding company operating community and mortgage banking businesses, with investments and services focused in part on fintech.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net interest income | $14.0 million | $11.5 million |
| Net interest margin | 3.45% | 3.29% |
| Net income | $3.2 million | $2.6 million |
| Net income available to common shareholders | $3.1 million | $2.5 million |
| Diluted EPS | $0.26 | $0.23 |
| Noninterest income | $8.8 million | $9.0 million |
| Noninterest expense | $18.4 million | $16.7 million |
| Efficiency ratio | 81.14% | 81.64% |
| Operating cash flow | $12.9 million | $15.2 million |
Net income rose about 23% year over year, supported by higher net interest income; higher expenses and lower noninterest income partly offset the improvement. Net interest income benefited from average loan and loans-held-for-sale growth of $223.9 million and a 52-basis-point increase in their yield. Funding costs also rose: interest expense increased to $5.7 million from $3.6 million, including higher deposit and borrowing costs. Noninterest expense increased primarily with staffing and growth-related costs. The company declared common dividends of $0.035 per share, versus $0.025.
Financial position, liquidity and credit
- Assets: $1.790 billion, up $38.9 million from year-end. Loans were $1.341 billion, up $36.9 million; available-for-sale and equity securities totaled approximately $234.6 million.
- Deposits and borrowings: Deposits were $1.431 billion, up $121.5 million. FHLB and other borrowings were $114.9 million, down approximately $100.0 million; repurchase agreements were $12.6 million. Brokered deposits were $153.7 million.
- Cash and cash equivalents: $18.0 million, down from $22.2 million at year-end. Cash from financing activities was $18.7 million, while investing activities used $35.9 million.
- Equity and regulatory capital: Stockholders’ equity was $180.9 million; equity-to-assets was 10.11%. Bank CET1 and Tier 1 risk-based capital ratios were each 12.55%, total risk-based capital was 13.37%, and leverage was 10.33%. Management classified the company as well-capitalized.
- Credit quality: Allowance for loan losses was $11.2 million, or 0.84% of loans. There were no loan charge-offs in the quarter. Nonperforming loans were $7.1 million, or 0.53% of loans, versus $9.1 million and 0.79% a year earlier. Impaired loans were $13.0 million; other real estate owned was $2.1 million.
Material changes, outlook and risks
- Year-over-year loan growth and improved loan yields lifted net interest income, but higher rates also increased deposit and borrowing costs. Management cited continued margin pressure from rate changes and competitive loan and deposit pricing.
- Noninterest income declined $0.3 million year over year, mainly due to lower securities-sale gains, commercial swap fees, portfolio-loan-sale gains and derivative gains; these were partly offset by higher bank-owned life insurance income, equity-security holding gains and deposit service charges.
- Management’s stated priorities are margin improvement, use of capital, organic loan growth and operating efficiency. It identified attracting core deposits to fund growth as a key challenge; no specific earnings or growth guidance was provided.
- Subsequent event: After a valuation of fintech investments, MVB said it intended to recognize a $13.5 million pretax gain in Q2 2019. The portfolio was then valued at approximately $17.3 million. This gain was not included in Q1 results.
- Credit and funding exposures: Three defaulted TDR loans totaling $3.7 million remained nonperforming. A $3.3 million commercial term-loan borrower was negotiating with a third-party operator, with negotiations expected to conclude in Q2. Commercial lending made up 71.7% of loans. The company also relied on brokered deposits and other wholesale funding, while reporting more than $243 million of additional FHLB borrowing capacity.
- Interest-rate sensitivity: The model, based on December 31, 2018 assumptions, projected a 0.7% decline in 12-month net interest income under an immediate 100- or 200-basis-point rate increase, and a 2.9% decline under a 100-basis-point decrease. Management cautioned actual outcomes may differ.
- Management reported no material change in market risks or risk factors since year-end. Ordinary-course legal matters were not expected to have a significant adverse effect. The company adopted lease accounting in Q1, recording $12.9 million of right-of-use assets and $15.7 million of lease liabilities. It was still evaluating the potentially material impact of the expected-credit-loss standard (CECL).
Important facts for investors to verify
- Whether the planned $13.5 million fintech investment gain was recognized in Q2, and its valuation basis and any tax impact.
- Whether loan growth, asset quality, TDR performance and the allowance remain consistent with management’s estimates.
- How deposit mix, brokered-deposit use and rising funding costs affect liquidity and net interest margin.
- Whether the company’s capital ratios, dividend capacity and planned growth remain adequate under regulatory and market conditions.
- The eventual effect of CECL implementation and lease obligations on reported results, capital and liquidity.