MVB FINANCIAL CORP quarterly report, Q3 FY2017

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MVB Financial Corp. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results cover MVB’s community banking and mortgage banking businesses. Unless noted, dollar figures are in millions. Management cautions that interim results are not necessarily indicative of full-year results.

Financial performance

  • Third-quarter earnings: Net income from continuing operations was $2.318 million, essentially unchanged from $2.310 million a year earlier. Net income available to common shareholders rose to $2.195 million from $1.996 million, while basic EPS fell to $0.21 from $0.25, reflecting a higher share count.
  • Nine-month earnings: Continuing-operations net income was $6.152 million versus $6.670 million; basic continuing-operations EPS was $0.56 versus $0.73. Prior-year net income included $3.935 million of after-tax discontinued-operations income, principally from the sale of the insurance business.
  • Net interest income and margin: Q3 net interest income increased 6% to $11.414 million; net interest margin expanded to 3.37% from 3.17%. For nine months, net interest income rose to $32.614 million from $32.166 million and margin improved to 3.29% from 3.22%. Higher asset yields were partly offset by higher funding costs.
  • Noninterest income and expenses: Q3 noninterest income fell to $10.158 million from $12.526 million, including a $1.306 million derivative loss versus approximately break-even a year earlier. Nine-month noninterest income was $30.549 million, down from $33.139 million; derivative results swung to a $2.216 million loss from a $1.433 million gain. Q3 expenses declined to $17.966 million from $18.739 million, while nine-month expenses edged up to $52.786 million from $52.395 million.
  • Profitability and efficiency: Q3 return on average assets was 0.63% and return on average equity 6.28%, compared with 0.64% and 7.32%, respectively. The Q3 efficiency ratio worsened to 83.28% from 80.58%; the nine-month ratio was 83.57% versus 80.23%.

Balance sheet, liquidity and capital

  • Total assets were $1.472 billion at September 30, up $52.8 million from year-end 2016. Gross loans were $1.094 billion, up $41.6 million, and available-for-sale securities were $187.3 million, up $25.0 million.
  • Deposits totaled $1.165 billion, up $58.2 million from year-end; noninterest-bearing deposits were $121.5 million. Cash and cash equivalents were $20.3 million, versus $17.3 million at year-end.
  • Cash provided by operating activities was $24.5 million for the first nine months, compared with $8.5 million used in the prior-year period. Investing activities used $68.4 million and financing activities provided $46.8 million.
  • Borrowings included $84.4 million of FHLB and other borrowings, $25.0 million of repurchase agreements and $33.5 million of subordinated debt. Management reported access to more than $228.7 million in additional FHLB advances and approximately $48 million remaining under its shelf registration, subject to conditions.
  • Stockholders’ equity was $149.0 million. Reported capital ratios were 10.76% common equity Tier 1, 11.79% Tier 1 risk-based, 15.18% total risk-based and 9.41% leverage; management said capital remained above well-capitalized thresholds.

Credit quality and material changes

  • Allowance for loan losses was $9.396 million, or 0.86% of loans, compared with $9.101 million at year-end. Nine-month provision expense declined to $1.137 million from $2.975 million; net charge-offs were $842,000 versus $1.831 million.
  • Nonperforming loans were $6.559 million, or 0.60% of loans, compared with $10.201 million, or 0.95%, a year earlier. Impaired loans were $12.387 million, up $573,000 from year-end. Troubled debt restructurings totaled $8.0 million, including $1.7 million in two nonperforming loans to one borrower.
  • Commercial loans represented 71.5% of the portfolio. Coal and natural-gas production loans totaled $6.4 million, down from $7.3 million at year-end. Management described energy exposure as limited.
  • The allowance methodology was changed to evaluate certain smaller impaired residential, home-equity and consumer loans collectively; the reported impact was a $168,000 increase in the allowance. Management identifies the allowance estimate as its most judgment-intensive accounting estimate.
  • The company redeemed $8.5 million of SBLF preferred stock in January 2017 and completed a rights offering that raised approximately $5.0 million. In 2016 it sold substantially all insurance-business assets, recording a $6.9 million pretax gain; that business is reflected in discontinued operations.

Outlook, risks and contingencies

  • Management provided no quantified earnings or revenue guidance. Its stated priorities are margin improvement, leveraging capital, organic loan growth and operating efficiency; it identified attracting core deposits to fund growth as a key challenge.
  • Management cited investment in personnel, technology and processes to support growth. Mortgage production volume declined 11.2% in Q3 and 3.1% year to date versus the comparable 2016 periods; lower mortgage-related derivative gains were a significant drag on noninterest income.
  • Interest-rate sensitivity modeling, based on June 30, 2017 assumptions, projected 12-month net interest income increases of 1.4% for an immediate 100-basis-point rate rise and 3.3% for a 200-basis-point rise, but a 3.7% decrease for a 100-basis-point decline. Actual effects may differ.
  • Principal risks include changes in interest rates, credit quality, local and national economic conditions, competition, deposit flows, regulation, technology and execution of growth plans. The filing reported no material change in risk factors and no legal proceedings expected to have a material adverse effect. Off-balance-sheet commitments to lend and letters of credit exist; total contractual amounts are not clearly provided in the filing text presented.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Investor facts to verify

  • Whether mortgage production and derivative results stabilize, and how much earnings depend on mortgage-related fees and fair-value marks.
  • Whether deposit growth can fund loan growth without materially increasing funding costs or compressing net interest margin.
  • Whether credit quality remains sound, particularly in commercial real estate, acquisition-and-development loans, impaired credits and the borrower with defaulted TDRs.
  • How the $168,000 allowance-methodology change and adoption of expected-credit-loss accounting may affect future reserves and earnings.
  • Whether capital, liquidity and the reported interest-rate sensitivity remain adequate under changing market conditions; review full disclosures of unfunded commitments and borrowing availability.