MVB Financial Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. MVB operates community banking and mortgage banking businesses, principally in West Virginia and Virginia. The company sold substantially all of its insurance business in June 2016; the remaining title-insurance operation is immaterial.
Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net interest income | $10.306 | $10.695 | Down 3.6%; net interest margin fell to 3.19% from 3.36% |
| Noninterest income | $8.824 | $8.612 | Up $0.212; mortgage fees rose to $9.634 from $6.785, offset by a $1.947 derivative loss versus a $0.401 gain |
| Noninterest expense | $16.317 | $15.991 | Up 2.0%; efficiency ratio worsened to 85.30% from 82.82% |
| Net income from continuing operations | $1.574 | $1.845 | Down 14.7% |
| Net income | $1.574 | $1.796 | Prior period included a $0.049 discontinued-operations loss |
| Net income available to common shareholders | $1.445 | $1.610 | Basic and diluted EPS were $0.14, versus $0.20 diluted in Q1 2016 |
| Operating cash flow | $19.741 | $7.751 | Investing used $35.598; financing provided $16.795 |
Management attributed weaker continuing earnings principally to lower net interest income, the derivative results, and higher expenses. Loan interest income was affected by a $0.662 million non-accrual interest recovery recognized in Q1 2016. Mortgage production volume increased 5.1% year over year, while mortgage-banking segment earnings declined to $0.116 million from $0.396 million as expenses rose.
Financial position, credit and capital
- Balance sheet at March 31: Assets were $1.434 billion, up $15.1 million from year-end 2016. Net loans were $1.067 billion, up $23.6 million; deposits were $1.136 billion, up $29.4 million. Available-for-sale securities were $172.8 million.
- Liquidity and funding: Cash and cash equivalents were $18.3 million, versus $17.3 million at December 31. Management said liquidity needs were adequately covered by cash, available funding sources, and maturing investment and loan balances. The company reported access to more than $263.9 million in additional FHLB advances. Deposit growth remains a stated funding priority.
- Debt: FHLB and other borrowings were $90.6 million, repurchase agreements $21.7 million, and subordinated debt $33.5 million. Short-term FHLB borrowings ended at $87.4 million; their period-end weighted-average rate was 0.99%. Subordinated debt’s period-end weighted-average rate was 6.64%.
- Credit: The allowance for loan losses was $9.372 million, or 0.87% of loans, versus $9.101 million at year-end. Nonperforming loans were reported as $6.575 million, or 0.61% of loans, compared with 0.77% a year earlier. Impaired loans increased 2.3% during the quarter to $12.428 million. Commercial loans represented 70.0% of the portfolio. TDRs totaled $8.7 million; $2.3 million involved three defaulted loans to two borrowers.
- Capital and equity: Stockholders’ equity was $138.7 million, down $6.9 million from year-end, primarily reflecting the $8.5 million redemption of Treasury SBLF preferred stock in January. Company ratios included 10.15% CET1, 11.19% Tier 1 risk-based capital, 14.63% total risk-based capital, and a 9.24% leverage ratio. The company stated capital remained well above required levels after the redemption.
Material changes, outlook and risks
- The $1.947 million derivative loss was a major year-over-year swing; management linked it largely to changes in the locked mortgage pipeline. Mortgage fee income increased substantially, but did not fully offset that impact on earnings.
- Management cited continued pressure on loan yields from low rates and competition, as well as higher borrowing costs. The Federal Reserve raised its target range in March 2017. The company’s December 2016 interest-rate simulation estimated a 3.8% increase in net interest income under an immediate 100-basis-point increase and a 5.8% decrease under a 100-basis-point decline; these are modeled sensitivities, not guidance.
- Management’s stated priorities were margin improvement, leveraging capital, organic loan growth, and operating efficiency, with attracting core deposits identified as a key challenge. It planned two branches for Q2 2017. No quantitative earnings or revenue guidance was provided.
- The bank was implementing a core-system conversion; management cited related data-processing costs and payroll capitalization. The filing also identifies exposure to interest-rate, credit, market, technology, regulatory, competitive, and local economic risks. West Virginia energy exposure was described as limited; loans to coal and natural-gas production clients totaled $7.0 million.
- After quarter-end, the rights offering was completed on April 14, with all 434,783 offered shares subscribed for, generating approximately $5.0 million. The CEO purchased 100,000 shares through the offering and related commitment. Shares outstanding were 10,440,328 as of May 3. The company reported no material change in risk factors, no material litigation expected to adversely affect results, and effective disclosure controls.
Important facts for investors to verify
- How much of mortgage-banking earnings and future results depends on derivative valuations, pipeline movements, and mortgage production volumes.
- Whether loan quality remains stable, particularly in commercial real estate and acquisition-and-development lending, and how impaired loans, defaults and the allowance evolve.
- Deposit growth, funding costs, available borrowing capacity, and the effect of higher rates on net interest margin and liquidity.
- The capital, dilution, and per-share effects of the completed rights offering, alongside the SBLF preferred-stock redemption.
- Whether planned branch expansion and the core-system conversion deliver the anticipated growth and efficiency without materially higher costs.