MVB FINANCIAL CORP quarterly report, Q2 FY2017

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MVB Financial Corp. — Q2 2017 Form 10-Q

Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2017. MVB operates community and commercial banking and mortgage banking, primarily in West Virginia and Virginia. The insurance business was largely sold in June 2016; accordingly, 2016 results include discontinued operations and a sale gain that did not recur in 2017. Comparisons below emphasize continuing operations where relevant. Dollar amounts are in millions unless stated otherwise.

Financial performance and position

  • Earnings: Q2 continuing-operations net income was $2.26 million versus $2.46 million a year earlier; diluted EPS was $0.20 versus $0.25. First-half continuing net income was $3.83 million versus $4.36 million; diluted EPS was $0.35 versus $0.45. Reported total net income was lower than in 2016 in part because 2016 included discontinued operations.
  • Revenue, costs and provision: Q2 net interest income increased to $10.89 million from $10.74 million, while noninterest income declined to $11.57 million from $12.00 million and noninterest expense rose to $18.50 million from $17.76 million. The loan-loss provision fell to $0.52 million from $1.28 million. For the first half, net interest income was $21.20 million versus $21.44 million; noninterest income was $20.39 million versus $20.61 million; noninterest expense was $34.82 million versus $33.66 million; and provision was $1.04 million versus $1.90 million.
  • Margins and efficiency: Net interest margin improved to 3.31% from 3.14% in Q2 and was 3.25% for the first half versus 3.24%. The reported efficiency ratio worsened to 82.38% from 78.07% for Q2 and to 83.72% from 80.04% for the first half.
  • Balance sheet: Total assets were $1.51 billion, up $88.2 million from year-end 2016. Gross loans were $1.10 billion, up $49.5 million; available-for-sale securities were $175.1 million, up $12.7 million. Deposits declined $7.4 million to $1.10 billion. Stockholders’ equity increased $1.2 million to $146.8 million.
  • Credit quality: Nonperforming loans were $5.1 million, or 0.46% of loans, versus $8.2 million, or 0.75%, a year earlier. The allowance for loan losses was $9.75 million, or 0.88% of loans, versus $9.10 million, or 0.84%, at year-end 2016. First-half net charge-offs were $0.39 million (charge-offs of $0.45 million less recoveries of $0.06 million), versus $0.82 million in the prior-year period. Impaired loans totaled $11.3 million at quarter-end; troubled debt restructurings totaled $8.0 million, including $1.7 million in two nonperforming loans to one borrower.
  • Cash flow and liquidity: First-half operating cash flow was negative $16.2 million, investing cash flow negative $67.1 million, and financing cash flow positive $83.7 million; cash and equivalents ended at $17.8 million. Operating cash use reflects, among other items, mortgage loans originated and sold. Management stated current cash and available funding sources meet liquidity needs. The Bank reported access to more than $167 million in additional FHLB advances.
  • Debt and capital: FHLB and other borrowings rose to $189.4 million from $90.9 million at year-end, primarily reflecting increased short-term FHLB funding; short-term FHLB borrowings were $186.8 million. Repurchase agreements fell to $22.2 million. Subordinated debt remained $33.5 million. Consolidated capital ratios were 10.32% CET1, 11.33% Tier 1, 14.66% total risk-based capital and 9.59% leverage; management reported these above well-capitalized thresholds.

Material changes and notable items

  • The company completed a $5.0 million rights offering in April 2017, issuing 434,783 common shares. It redeemed $8.5 million of Series A preferred stock in January, ending participation in the Small Business Lending Fund. Common shares outstanding were 10,443,273 as of July 30, 2017.
  • Mortgage fee income rose $2.4 million for the first half but fell $0.45 million in Q2 year over year. First-half derivative results shifted to a $0.91 million loss from a $1.43 million gain in 2016, a significant source of variability. The mortgage segment’s earnings declined to $0.83 million in Q2 and $0.94 million for the first half.
  • Management attributed higher operating costs in part to the Bank’s Q2 core-system conversion, including higher data-processing, occupancy and related expenses. Full-time equivalent staff increased to 386 from 356 a year earlier.
  • Loan growth was concentrated in commercial lending: commercial loans were 71.0% of the portfolio. Energy-sector exposure to coal and natural-gas production clients was $6.7 million, down from $7.3 million at year-end.

Outlook, risks and contingencies

  • Management identified margin improvement, capital leverage, organic loan growth and operating efficiency as priorities. It highlighted attracting core deposits to fund growth as a key challenge. The filing provides no specific numerical earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
  • Interest-rate sensitivity modeling, based on March 31, 2017 assumptions, estimated that an immediate 100-basis-point rate increase would raise 12-month net interest income 1.7%, a 200-basis-point increase would raise it 2.2%, and a 100-basis-point decrease would reduce it 4.2%. Actual outcomes may differ.
  • Key disclosed risks include local and broader economic conditions, interest rates, loan and securities quality, funding and deposit competition, mortgage-market activity, regulation, technology and system implementation, and execution of growth plans. The filing reported no material change in risk factors or market risks since year-end 2016.
  • The Bank has ordinary-course legal matters; management and counsel did not expect a significant adverse effect. Off-balance-sheet credit commitments and standby letters of credit create potential credit and funding exposure, but commitments may expire undrawn. Management reported effective disclosure controls and no material Q2 change in internal control over financial reporting.

Important facts for investors to verify

  1. Whether loan growth and lower nonperforming-loan levels persist, and whether the allowance remains adequate as commercial lending expands.
  2. How the core-system conversion affects ongoing expenses and whether efficiency improves from the reported 82.38% Q2 ratio.
  3. Whether mortgage production and fee income recover, and how mortgage pipeline hedging and derivative marks affect quarterly results.
  4. How the sharp increase in FHLB funding, deposit trends, and higher borrowing costs affect liquidity and net interest margin.
  5. Whether management’s stated capital ratios and liquidity sources remain sufficient as growth continues; also review the detailed terms and potential dilution associated with outstanding convertible subordinated notes and preferred shares.