MVB Financial Corp. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results include MVB Bank, MVB Mortgage, and subsidiaries. Dollar amounts below are in U.S. dollars; financial statement amounts are stated in millions unless noted otherwise.
Business context and reporting period
MVB is a West Virginia-based financial holding company focused on community banking and mortgage banking, with operations in West Virginia, Virginia, and other southeastern markets. On June 30, 2016, the company sold substantially all assets of MVB Insurance to USI Insurance Services. The title insurance business was retained and is immaterial by revenue. The sale is reported in discontinued operations.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $10.742 | $8.426 | $21.437 | $15.973 |
| Noninterest income | $12.001 | $9.647 | $20.613 | $19.419 |
| Provision for loan losses | $1.275 | $0.561 | $1.900 | $1.220 |
| Noninterest expense | $17.756 | $14.545 | $33.656 | $28.427 |
| Income from continuing operations, net | $2.458 | $2.079 | $4.360 | $3.839 |
| Net income from discontinued operations | $4.041 | $(0.174) | $3.935 | $0.169 |
| Net income | $6.499 | $1.905 | $8.295 | $4.008 |
| Diluted EPS from continuing operations | $0.25 | $0.23 | $0.45 | $0.43 |
| Diluted EPS, total | $0.63 | $0.21 | $0.85 | $0.45 |
- The USI transaction generated a $6.926 million pretax gain, included in discontinued operations. Accordingly, total net income and EPS include a material, nonrecurring transaction benefit.
- Net interest margin was 3.14% for Q2 and 3.24% for the first half, compared with 3.06% and 3.01%, respectively, in 2015. The efficiency ratio was 78.07% for Q2 and 80.04% for the first half, versus 80.47% and 80.32%.
- Management attributed higher net interest income primarily to loan growth. Mortgage fees increased, while derivative gains were higher in Q2 but lower for the six-month period compared with 2015. The six-month commercial loan yield benefited from a $662,000 recovery of nonaccrual interest on one commercial relationship.
- Noninterest expense rose year over year, led by salary and benefit costs, reflecting additional staffing, new locations, incentives, and growth-related spending. First-half expenses also included a $500,000 reorganization expense at the holding-company segment.
Balance sheet, cash flow, and liquidity
- At June 30, 2016, total assets were $1.485 billion, up $100.5 million from December 31, 2015. Gross loans were $1.088 billion; net loans were $1.078 billion. Loans held for sale were $131.7 million.
- Deposits totaled $1.067 billion, up $54.9 million from year-end. Cash and cash equivalents were $28.8 million. Stockholders’ equity was $124.0 million.
- Funding included $213.0 million of FHLB and other borrowings, $26.0 million of repurchase agreements, and $33.5 million of subordinated debt. Short-term FHLB borrowings were $209.8 million at quarter-end. Management reported access to more than $143 million of additional FHLB advances, as well as other funding sources.
- For the first six months, operating cash flow was negative $20.3 million, investing cash flow was negative $62.6 million, and financing cash flow was positive $82.5 million. Cash decreased $0.4 million to $28.8 million. Operating cash flow reflects substantial mortgage loan originations and sale activity.
- The Bank’s reported capital ratios were 11.47% Tier 1, 12.25% total risk-based, and 9.31% leverage. The total risk-based ratio declined from 13.0% at year-end, primarily after $22 million of acquisition and development loans were classified as high-volatility commercial real estate loans.
Material changes, risks, and management commentary
- Gross loans increased from $1.032 billion at year-end to $1.088 billion; commercial loans represented 70.0% of the portfolio. Loans-to-deposits were 101.90%.
- The allowance for loan losses increased to $9.091 million, or 0.84% of loans, from $8.006 million, or 0.78%, at year-end. First-half charge-offs were $826,000, versus $424,000 in the first half of 2015. Management cited higher qualitative loss factors, charge-offs, and identified impairments.
- Impaired loans were $13.271 million at June 30, down from $15.375 million at year-end. Management described three material commercial credit issues, including a development loan with a $535,000 Q2 charge-off and related commercial loans affected by the coal-industry downturn. Nonperforming loans were 0.75% of total loans.
- Coal and natural gas production client loans totaled $7.5 million at quarter-end. The filing also reports $8.8 million of troubled debt restructurings, including $2.4 million in three defaulted loans.
- Management’s stated priorities are margin improvement, capital leverage, organic loan growth, operating efficiency, and attracting core deposits to fund expansion. The filing provides no quantified earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Management cited risks including credit deterioration, competition for deposits and loans, interest-rate and market changes, economic conditions, regulatory requirements, technology and cybersecurity, and the ability to execute growth plans. A simulation based on March 31, 2016 assumptions estimated 12-month net interest income changes of +1.05% for an immediate 100-basis-point rate increase, +0.97% for a 200-basis-point increase, and −3.06% for a 100-basis-point decrease; actual outcomes may differ.
- Management stated that ordinary-course legal matters were not expected to have a significant adverse financial effect and that there were no material changes to previously disclosed risk factors. Disclosure controls were reported effective, with no material Q2 changes in internal control over financial reporting.
Most important facts for investors to verify
- Separate recurring continuing-operations earnings from the $6.926 million pretax insurance-sale gain and confirm the transaction’s final effects and retained title-business activity.
- Track loan-loss provision, charge-offs, criticized and impaired credits, especially the development and coal-related commercial exposures, and the adequacy of the $9.091 million allowance.
- Assess whether loan growth can be funded by stable core deposits, given loans-to-deposits above 100%, increased FHLB borrowing, and reported available borrowing capacity.
- Monitor the sustainability of mortgage income and derivative gains, as well as rising personnel and operating expenses.
- Confirm the impact of HVCRE risk-weighting on capital ratios and assess the sensitivity of earnings to interest-rate changes.