MVB Financial Corp. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Statements are unaudited; financial amounts below are in millions unless otherwise stated. MVB is a West Virginia-based financial holding company with commercial and retail banking, mortgage banking, and insurance businesses.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $8.4 | $7.2 | $16.0 | $14.2 |
| Noninterest income | $10.5 | $7.1 | $21.9 | $12.8 |
| Net income | $1.9 | $1.0 | $4.0 | $2.1 |
| Net income available to common shareholders | $1.8 | $0.9 | $3.7 | $2.1 |
| Diluted earnings per share | $0.22 | $0.12 | $0.46 | $0.26 |
Operating revenue, defined as net interest income plus noninterest income, was $19.0 million in Q2 and $37.9 million for the first half, compared with $14.3 million and $27.0 million, respectively, a year earlier. Mortgage fee income drove much of the increase: $8.6 million in Q2 and $14.9 million in the first half, versus $4.3 million and $7.5 million.
- Margins and returns: Net interest margin was 3.06% in Q2 (2.99% prior year) and 3.01% for the first half (3.07% prior year). Annualized Q2 ROA was 0.64% and ROE 6.84%, versus 0.37% and 3.93%.
- Expenses and credit costs: Noninterest expense rose to $15.7 million in Q2 and $30.7 million for the first half, from $12.2 million and $23.0 million. The efficiency ratio improved to 82.90% for Q2 and 80.90% for the first half. Loan-loss provision was $0.6 million in Q2 and $1.2 million for the first half; first-half net charge-offs were $0.4 million.
- Balance sheet at June 30: Assets were $1.253 billion, up $142.6 million from year-end 2014. Loans were $911.1 million, up $112.8 million; loans held for sale were $116.3 million, up $46.8 million. Deposits were $891.0 million, up $67.7 million. Stockholders’ equity was $113.3 million.
- Funding and liquidity: Cash and cash equivalents declined to $14.0 million from $30.1 million at year-end. First-half operating cash flow was negative $40.4 million, investing cash flow negative $113.2 million, and financing cash flow positive $137.6 million; mortgage loan originations and loan growth were major cash uses, funded in part by deposit growth and increased FHLB borrowing. Loans were 102.26% of deposits, versus 98.29% a year earlier.
- Debt and capital: FHLB and other borrowings totaled $178.2 million, repurchase agreements $26.3 million, and subordinated debt $33.5 million. Bank capital ratios were 12.25% Tier 1, 12.96% risk-based, and 10.33% leverage; management said the Company and Bank exceeded minimum well-capitalized standards.
Material changes and management commentary
- Compared with Q2 2014, Q2 net income nearly doubled, primarily as mortgage production and fees increased; management reported mortgage origination volume up 69% for the quarter and 94% for the first half. First-half insurance and investment-services income also rose.
- Asset growth included substantial loan and loans-held-for-sale growth. Management said loan growth was primarily organic, across its West Virginia and Northern Virginia markets.
- Higher staffing and operating costs accompanied expansion: full-time equivalent employees increased to 351 from 313 a year earlier. Salary and benefits were the largest contributor to higher expense.
- The company reported a 1.07% nonperforming-loan-to-total-loan ratio in June 2015, versus 0.35% in June 2014. Impaired loans totaled $13.7 million; 59% was concentrated in two loans. One is a Northern Virginia commercial property affected by tenant contract losses, and MVB is pursuing legal recourse against the institution that sold the loan.
- On May 1, 2015, MVB agreed to acquire two Susquehanna Bank branches in Berkeley County and assume approximately $69 million of deposits and $17 million of loans. Regulatory approvals were received July 22; closing was expected August 28, 2015.
Outlook, risks, and unusual items
- No numerical earnings or financial guidance was provided. Management identified margin improvement, capital leverage, organic loan growth, and operating efficiency as priorities, and said attracting core deposits to fund growth is a key challenge.
- Management cited continued low interest rates and competition for quality loans as pressure on loan yields. The loan-to-deposit ratio above 100% and reliance on increased FHLB funding are relevant to funding and liquidity monitoring; management reported access to additional FHLB advances and other funding sources.
- Unrealized investment-security losses were $1.539 million pretax. Management characterized the declines as temporary and said it had the intent and ability to hold the securities until recovery. A $421,000 held-to-maturity security was sold following a credit downgrade.
- Risk factors include credit quality and collateral values, local economic conditions, interest-rate and market movements, mortgage-volume variability, competition, regulatory changes, technology and cybersecurity, and the ability to execute acquisitions and growth plans. Management reported no known legal proceedings expected to have a material adverse effect; the loan-sale dispute is described above.
- Disclosure controls were assessed as effective at June 30, 2015, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether mortgage origination volumes, fees, and derivative gains can be sustained, and how sensitive results are to interest rates and refinancing activity.
- How deposit growth compares with loan growth, and whether increased FHLB borrowings or other wholesale funding remain necessary.
- Changes in nonperforming and impaired loans, particularly the two concentrated impaired credits, the commercial property exposure, and the outcome of the loan-sale legal claim.
- Whether the planned branch acquisition closed on the expected date and its actual effect on deposits, loans, expenses, and capital.
- Future net interest margin, expense growth, credit-loss provisions, and regulatory capital ratios. The filing cautions that interim results are not necessarily indicative of full-year results.