MVB Financial Corp. — Q2 2018 Form 10-Q
Business context and reporting period. MVB is a West Virginia-based financial holding company operating community and retail banking, mortgage banking, insurance and related businesses. This unaudited filing covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
- Q2 earnings: Net income was $2.83 million, up from $2.26 million a year earlier; diluted EPS was $0.25 versus $0.20. For the first half, net income was $5.43 million versus $3.83 million, and diluted EPS was $0.47 versus $0.35.
- Revenue and margins: Q2 net interest income rose to $12.66 million from $10.89 million; noninterest income declined to $10.80 million from $11.57 million. First-half net interest income was $24.12 million versus $21.20 million; noninterest income was $19.83 million versus $20.39 million. Net interest margin was 3.38% for Q2 and 3.34% for the first half, compared with 3.31% and 3.25%, respectively, in 2017. The first-half efficiency ratio improved to 81.88% from 83.72%.
- Growth and funding: Total assets increased to $1.685 billion from $1.534 billion at year-end; loans were $1.215 billion, up $109.1 million, and deposits were $1.196 billion, up $36.3 million. Cash and cash equivalents were $24.0 million. FHLB and other borrowings rose to $266.8 million from $152.2 million; subordinated debt fell to $20.8 million from $33.5 million after $12.7 million was converted into common shares.
- Profitability and capital: First-half return on average assets was 0.69% and return on average equity was 7.17%, versus 0.54% and 5.45% a year earlier. Equity was $165.8 million, or 9.84% of assets. Reported CET1, Tier 1 risk-based and total risk-based capital ratios were 11.28%, 12.20% and 14.34%, respectively.
- Credit quality: The allowance for loan losses was $10.7 million, or 0.88% of loans. Nonperforming loans were $9.4 million (0.78% of loans), up from $5.1 million (0.46%) at June 30, 2017. Impaired loans totaled $15.2 million; other real estate owned was $1.8 million.
- Cash flow: First-half operating cash flow was negative $26.8 million, investing cash flow negative $118.9 million, and financing cash flow positive $149.3 million. Cash increased $3.6 million to $24.0 million. Mortgage loan originations and sales and loan growth were significant cash-flow items.
Material changes and management commentary
- Management attributed higher earnings principally to loan growth, improved asset yields and higher net interest income; the lower effective tax burden also benefited Q2 results following the 2017 federal tax-law change.
- Funding costs increased: first-half interest expense rose to $7.88 million from $5.68 million, including higher FHLB borrowing costs. Management noted pressure from rising rates and competition for loans and deposits.
- Mortgage fee income fell to $15.6 million for the first half from $18.6 million, alongside a 4.4% decline in mortgage production volume. Higher derivative gains partially offset the fee decline.
- First-half other comprehensive loss was $3.57 million, primarily reflecting unrealized securities losses. Available-for-sale securities had $6.6 million of gross unrealized losses; management characterized them as temporary and said it intended and was able to hold the securities for recovery.
- Management’s stated priorities are margin improvement, using capital effectively, organic loan growth and operating efficiency. It identified attracting core deposits to fund growth as a key challenge. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A $3.2 million commercial loan was matured and reported past due while renewal terms were negotiated; the borrower was involved in litigation. The filing also reports $6.4 million of troubled debt restructurings at June 30.
- Interest-rate sensitivity modeling, based on March 31 assumptions, estimated that an immediate 100-basis-point rate increase would raise 12-month net interest income by 0.4%, while a 100-basis-point decrease would reduce it by 4.0%. Actual results may differ.
- The company cited risks including credit losses, deposit competition and funding costs, interest-rate and market movements, economic and real-estate conditions, regulatory changes, technology and cybersecurity, and execution of growth plans. Management reported no known legal proceedings expected to have a material adverse effect and no material change in disclosed risk factors.
- The company early adopted an accounting update and reclassified $646,000 of stranded tax effects from accumulated other comprehensive income to retained earnings. It also adopted new equity-security accounting; the adoption was not material to the financial statements.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained without further material reliance on higher-cost FHLB funding, and how funding costs affect net interest margin.
- Developments in the $3.2 million matured commercial loan, TDRs, nonperforming loans and other real estate owned, as well as allowance adequacy.
- Mortgage production, fee income and derivative-related gains, including the volatility of mortgage pipeline hedge valuations.
- Whether unrealized securities losses remain temporary and the effect of interest-rate movements on earnings, liquidity and capital.
- Capital and share dilution effects of subordinated-debt and preferred-stock conversion rights; common shares outstanding were 11,337,625 as of July 29, 2018.