MVB FINANCIAL CORP quarterly report, Q2 FY2020

MVB Financial Corp. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise. MVB is a financial holding company whose businesses include community banking, mortgage banking, and fintech/compliance services.

Financial performance

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Net interest income	$18.5	$14.5	$34.6	$28.5
Provision for loan losses	$6.6	$0.6	$7.7	$0.9
Noninterest income	$45.5	$26.4	$56.4	$35.2
Noninterest expense	$33.3	$20.4	$58.0	$38.8
Net income from continuing operations	$18.0	$14.9	$19.1	$18.1
Diluted EPS from continuing operations	$1.49	$1.15	$1.55	$1.41

Revenue and earnings benefited from strong mortgage production, derivative gains, and transaction-related gains. Q2 noninterest income included $13.4 million of derivative gains, a $9.6 million gain on branch sales, and a $4.7 million bargain-purchase gain. Mortgage fee income was $14.9 million in Q2 and $26.2 million for the half year.
The Q2 2020 tax-equivalent net interest margin was 3.78% versus 3.53%; for the half year it was 3.73% versus 3.52%. MVB attributed the improvement mainly to lower funding costs, partly offset by lower asset yields. Management said the low-rate environment is pressuring net interest income.
Q2 efficiency ratio was 52.11% versus 49.83%. For the half year it was 63.73% versus 61.02%. Higher personnel costs, deal expenses, and other growth-related spending weighed on efficiency.
Return on average assets was 3.29% for Q2 and 1.84% for the first half; return on average equity was 32.89% and 17.57%, respectively. These are annualized figures reported by the company.

Financial position, liquidity, and credit

At June 30, 2020, total assets were $2.22 billion, up $271 million from year-end 2019. Loans were $1.49 billion gross ($1.48 billion net), compared with $1.37 billion gross at year-end. Loans held for sale were $242.1 million.
Deposits rose to $1.86 billion from $1.27 billion; noninterest-bearing deposits were $528.5 million, up from $278.5 million. Cash and cash equivalents increased to $78.9 million from $28.0 million. Management said it was maintaining higher cash liquidity given pandemic uncertainty.
Borrowings declined to $36.6 million from $222.9 million at year-end; short-term borrowings were zero at June 30. Repurchase agreements were $9.8 million and subordinated debt was $4.1 million. MVB reported more than $423.8 million of additional FHLB borrowing capacity.
Six-month cash flows were $120.7 million used in operating activities, $89.3 million used in investing activities, and $260.8 million provided by financing activities; cash increased $50.9 million. Operating cash use reflects, in part, high mortgage-loan originations for sale.
The allowance for loan losses was $17.7 million, or 1.19% of loans, versus $11.8 million and 0.86% at year-end 2019. The six-month provision was $7.7 million. Nonperforming loans were $14.1 million, or 0.94% of loans, versus $6.8 million and 0.51% a year earlier.
Special Mention loans, excluding First State acquired loans, rose to $74.8 million from $25.2 million at year-end. Management cited downgrades involving hotels, retail real estate, cinemas, and a private school borrower. Impaired loans excluding acquired First State loans increased $8.1 million during the half year, largely from newly identified commercial exposures.
During Q2, $223.9 million of commercial loans and $17.5 million of mortgage loans were approved for payment modifications; the filing says these were not TDRs. The bank originated 455 PPP loans totaling $89.8 million at quarter-end.
Stockholders’ equity was $228.5 million, up from $211.9 million at year-end. The bank’s June 30 capital ratios included a 9.50% leverage ratio, 12.24% CET1 ratio, and 13.31% total risk-based capital ratio. The filing states the company was well-capitalized.

Material changes and unusual items

On April 3, MVB acquired selected assets and liabilities of First State Bank through an FDIC-assisted transaction. It received $39.6 million in cash consideration from the FDIC and recorded a $4.7 million bargain-purchase gain. Acquired deposits had fair value of $142.5 million; acquired loans had fair value of $60.7 million.
On April 24, MVB completed the sale of four Eastern Panhandle branches to Summit, transferring approximately $188.1 million of deposits and $36.8 million of loans and recording a $9.6 million gain. MVB exited that market.
MVB acquired substantially all assets and certain liabilities of Paladin, a fraud-prevention business, for shares and cash; the cash amount is not stated in the provided filing text.
Mortgage production and loans sold increased substantially year over year. MVB’s mortgage business combined with Intercoastal Mortgage after quarter-end; the filing reports completion on July 1 and expects a $1 million to $3 million gain, subject to final fair-value accounting. Another MD&A passage refers to the mortgage transaction as closing August 1; verify the date and accounting treatment.
The 2019 comparison included a $13.8 million unrealized holding gain on equity securities, versus only $17,000 in the first half of 2020. This made year-over-year noninterest-income comparisons less comparable despite higher 2020 reported income.

Outlook, risks, and contingencies

MVB provided no specific earnings or revenue guidance. Management’s stated priorities are margin improvement, capital leverage, organic loan growth, and operating efficiency, with continued emphasis on core deposits and treasury services for fintech and emerging-technology clients.
Management said the full COVID-19 impact was unknown and not reasonably estimable. It expected near-term borrower stress and possible deferred cash flows, and cited significantly higher unemployment in its markets. The company increased liquidity and said it expected core deposits to remain relatively stable in the near term.
MVB described itself as asset-sensitive and expects lower interest rates to reduce net interest income. Its March 31 simulation estimated that an immediate 100-basis-point rate decrease would reduce 12-month net interest income by 4.8%; a 100-basis-point increase would raise it 6.0%. These are model estimates, not forecasts.
PPP-related risks include possible borrower or third-party litigation and potential SBA denial or recovery of loan guarantees if origination, funding, or servicing deficiencies are found. The filing also identifies general pandemic, credit, liquidity, interest-rate, acquisition-integration, and operational risks.
Management stated that ordinary-course legal matters were not expected to have a significant adverse effect. No material subsequent event other than the mortgage combination was identified in the provided filing text.

Investor verification priorities

Assess credit migration and loss exposure in the hotel, retail, cinema, and other downgraded relationships; monitor Special Mention, impaired, nonperforming, and modified loans.
Evaluate the adequacy of the allowance against pandemic-related uncertainty, including acquired First State loans and the large commercial concentration.
Separate recurring earnings from derivative gains, the branch-sale gain, bargain-purchase gain, and prior-year equity valuation gains; verify the sustainability of mortgage production and gains.
Reconcile reported liquidity and deposit growth with brokered deposits, fintech/title-related balances, loan deferrals, and available borrowing capacity.
Confirm the effective date, final valuation, expected gain, and future earnings presentation for the Intercoastal mortgage transaction; the filing contains differing closing-date references.
Track interest-rate sensitivity, capital ratios, and the effects of lower rates on asset yields and net interest income.