MVB Financial Corp. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results include MVB Bank, MVB Mortgage and MVB Insurance. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
- Third quarter: Net income was $1.406 million, compared with $0.537 million a year earlier; net income available to common shareholders was $1.261 million, or $0.16 per diluted share, versus $0.393 million, or $0.05 per share.
- Nine months: Net income was $5.414 million versus $2.664 million; income available to common shareholders was $4.984 million, or $0.62 per diluted share, versus $2.477 million, or $0.31 per share.
- Revenue and earnings drivers: Nine-month interest income was $31.748 million and noninterest income was $31.899 million, producing total operating income of $63.647 million versus $46.034 million. Mortgage fee income rose to $23.881 million from $12.491 million. Net interest income increased to $24.991 million from $21.249 million; the loan-loss provision declined to $1.856 million from $2.192 million.
- Expenses and margins: Nine-month noninterest expense increased to $47.102 million from $35.239 million, including higher salaries, occupancy, data processing and mortgage-processing costs. Net interest margin was 3.11% for Q3 versus 2.91%; the nine-month margin was 3.02%, unchanged year over year. The efficiency ratio improved to 82.79% for nine months from 86.69% (Q3: 86.57% versus 89.57%).
- Balance sheet at September 30: Assets were $1.307 billion, up from $1.110 billion at December 31, 2014. Gross loans were $994.8 million versus $798.3 million; deposits were $1.018 billion versus $823.2 million. Stockholders’ equity was $114.1 million, and book value was $12.05 per share.
- Liquidity and cash flow: Cash and cash equivalents were $25.1 million, down from $30.1 million at year-end. Nine-month operating cash flow was $6.3 million versus $42.1 million; investing cash outflow was $131.3 million and financing inflow was $120.0 million. Management cited cash, available funding sources and near-term portfolio maturities as liquidity resources, and reported access to more than $249 million in additional FHLB advances.
- Borrowings and capital: At quarter-end, repurchase agreements were $26.6 million, FHLB and other borrowings $102.5 million, and subordinated debt $33.5 million. Bank capital ratios were 11.88% Tier 1, 12.60% risk-based capital and 9.96% leverage; management said Company and Bank ratios exceeded minimum well-capitalized standards.
Material changes and notable items
- The Bank acquired two Susquehanna Bank branches in Berkeley County, West Virginia, on August 28, 2015, assuming approximately $68.7 million of deposits and acquiring $18.2 million of loans. The transaction added $0.7 million of goodwill and incurred $0.642 million of acquisition costs during the first nine months.
- Mortgage banking growth was a major contributor: management reported origination volume up 82% for the first nine months, with higher mortgage fees and staffing costs. The insurance segment moved from a $0.401 million loss to $0.065 million of income for the nine-month period.
- Q3 noninterest income included a $2.039 million loss on derivatives, versus a $0.391 million loss in Q3 2014; the filing attributes the period change partly to lower loans held for sale. This item makes reported noninterest income less indicative of underlying recurring performance.
- Gross loans to deposits increased to 97.70% from 90.15% a year earlier. The allowance was $7.388 million, or 0.74% of loans, versus 0.83% at September 30, 2014.
Outlook, risks and contingencies
- No quantified earnings or financial guidance is provided. Management’s stated priorities are margin improvement, capital leverage, organic loan growth and operating efficiency; it identified attracting core deposits to fund expansion as a key challenge.
- Credit risks include commercial-loan concentrations and local economic conditions. Nonperforming loans were 0.94% of loans in September 2015 versus 0.62% a year earlier. Impaired loans totaled $12.9 million, with 60% concentrated in two loans. One is a Northern Virginia commercial property affected by government-contractor tenants vacating after losing contracts; the Bank is pursuing legal recourse against the selling institution, alleging breach of the loan sale agreement. The filing also describes exposure to the coal industry.
- Troubled debt restructurings totaled $7.6 million; $2.5 million involved three loans to two borrowers that had defaulted on restructured terms and remained nonperforming. Management’s allowance estimate is judgmental and actual losses may differ.
- Management cited interest-rate and funding competition, economic and real-estate conditions, acquisition integration, regulatory and capital requirements, technology and cybersecurity, and legal proceedings among risks. It reported no known legal matters expected to have a material adverse effect and no material change in market risk. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether mortgage origination growth and unusually high mortgage fee income are sustainable, and how results change with refinance volumes and interest rates.
- Credit quality and loss exposure in the concentrated impaired loans, including the Northern Virginia loan and the Bank’s legal claim; also track nonperforming loans, TDR defaults, charge-offs and allowance coverage.
- How the branch acquisition contributes to deposits, loan growth, expenses and profitability after integration.
- Funding mix and liquidity as loan-to-deposit levels rise, including the terms and availability of contingent FHLB and other wholesale funding.
- The effect of derivative valuation swings, subordinated-debt costs and capital requirements on recurring earnings and capital ratios.