MVB Financial Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. MVB is a financial holding company operating community and retail banking, mortgage banking, and compliance consulting businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net interest income | $16.2 million | $14.0 million |
| Provision for loan losses | $1.1 million | $0.3 million |
| Noninterest income | $10.9 million | $8.8 million |
| Noninterest expense | $24.7 million | $18.4 million |
| Net income | $1.0 million | $3.2 million |
| Net income available to common shareholders | $0.9 million | $3.1 million |
| Diluted earnings per share | $0.08 | $0.26 |
| Net interest margin | 3.60% | 3.45% |
| Efficiency ratio | 91.25% | 81.14% |
| Annualized return on average assets / equity | 0.22% / 1.95% | 0.73% / 7.18% |
Net interest income rose 16%, while noninterest income increased 24%, led by mortgage fees and Chartwell consulting revenue. These gains were outweighed by a $6.2 million increase in noninterest expenses, including higher staffing, mortgage production, Fintech investment, and professional costs, and by a $1.1 million credit-loss provision. A $3.6 million net loss on derivatives, associated with volatile mortgage-backed securities and servicing-rights markets, also weighed on results. Mortgage banking reported a $1.1 million segment loss, compared with $0.3 million of income a year earlier; commercial and retail banking earned $3.7 million, versus $4.2 million.
Balance sheet, liquidity, debt, and credit
- Total assets were $2.10 billion at March 31, up $155.6 million from year-end. Loans were $1.40 billion, up $22.0 million; loans held for sale were $186.1 million.
- Deposits increased $333.2 million to $1.60 billion. Noninterest-bearing deposits were $387.5 million. Management cited liquidity precautions related to COVID-19; brokered deposits were $181.2 million at quarter-end, versus $63.9 million at year-end.
- Cash and cash equivalents increased to $88.9 million from $28.0 million. Cash from operating activities was negative $78.6 million, compared with positive $12.9 million in Q1 2019, reflecting higher mortgage loans originated for sale and changes in working capital. Financing activities provided $138.4 million, principally from deposit growth and reduced borrowings.
- FHLB and other borrowings were $30.8 million, down from $222.9 million at year-end; short-term borrowings were zero at quarter-end. Repurchase agreements were $9.3 million and subordinated debt was $4.1 million. The filing reports more than $295.6 million of additional FHLB borrowing capacity.
- The allowance for loan losses was $11.2 million, or 0.80% of loans, versus $11.8 million, or 0.86%, at year-end. Q1 net charge-offs were $1.8 million, including a $1.8 million government lease-financing loan charge-off unrelated to COVID-19.
- Nonperforming loans were $5.9 million, or 0.42% of loans. Impaired loans rose to $10.2 million from $9.5 million at year-end; other real estate owned was $1.2 million. Management noted that the full credit effects of the pandemic were not yet measurable.
- Stockholders’ equity was $211.2 million, down $0.8 million from year-end; equity to assets was 10.06%. The Bank’s reported common equity Tier 1 and total risk-based capital ratios were 11.34% and 12.04%, respectively. The company stated it was well-capitalized.
Material changes, outlook, and risks
- COVID-19: Management said the pandemic’s financial impact could be material but could not yet be reasonably estimated. It expected near-term pressure on net interest income as rates fell, and anticipated some borrowers might need payment deferrals. The company was participating in the Paycheck Protection Program and offering consumer deferrals consistent with GSE guidance.
- Outlook: Management expected strong PPP demand, anticipated core deposits to increase, and focused on margin improvement, loan growth, operating efficiency, and deposit gathering. These are expectations, not quantified earnings guidance. Management also expected lower Treasury yields to pressure net interest income given the company’s asset-sensitive position.
- Liquidity and funding: MVB increased cash, sold certain securities, and issued brokered deposits in anticipation of deferrals and other disruptions. Management said it could sell additional available-for-sale securities, but market conditions and funding costs remain risks.
- Transactions after quarter-end: On April 3, the Bank acquired certain First State Bank assets and assumed about $140 million of deposits through an FDIC transaction; it estimated a bargain purchase gain of about $6 million, with purchase accounting still being finalized. On April 24, it completed the sale of four branches to Summit, which assumed about $188.1 million of deposits and acquired about $36.8 million of loans; MVB expected an approximately $10 million gain. A mortgage-business combination with Intercoastal was expected to close in mid-2020, subject to approvals, in exchange for a 47% common interest and $7.5 million of preferred units. MVB also acquired Paladin Fraud assets on April 17 for shares and cash; the cash amount was not disclosed.
- Other risks and contingencies: The portfolio is concentrated in commercial lending (78.4% of loans), with exposure to commercial real estate, local economic conditions, and borrower industries. The company identified ordinary-course legal matters but said they were not expected to have a significant adverse effect. It repurchased 16,300 shares in March at an average $16 per share under its $5 million authorization.
Important facts for investors to verify
- How COVID-19, loan deferrals, PPP lending, and economic deterioration affect credit quality, allowance needs, and actual charge-offs.
- Whether elevated mortgage production and derivative valuation volatility persist, and how the mortgage segment performs after the proposed Intercoastal combination.
- The final accounting and realized financial effects of the First State and Summit transactions, including the estimated bargain purchase gain and branch-sale gain.
- The sustainability and cost of deposit growth, including brokered funding, and the effect of the sharp decline in borrowings on liquidity and net interest income.
- Whether expense growth moderates and efficiency improves; Q1 earnings fell materially despite higher net interest income and noninterest income.