MVB Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. MVB is a financial holding company operating primarily through community banking and mortgage banking subsidiaries. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
- Q2 earnings: Net income from continuing operations was $14.9 million, versus $2.8 million a year earlier. Including $0.4 million of after-tax discontinued-operations income, net income was $15.4 million. Diluted EPS was $1.15 from continuing operations and $1.18 including discontinued operations, compared with $0.25 in Q2 2018.
- First-half earnings: Continuing-operations net income was $18.1 million, versus $5.4 million in first-half 2018; total net income was $18.6 million. Diluted EPS was $1.41 from continuing operations and $1.44 including discontinued operations, versus $0.47.
- Net interest income and margin: Q2 net interest income rose to $14.5 million from $12.7 million; net interest margin was 3.46%, versus 3.38%. For the six months, net interest income was $28.5 million versus $24.1 million, and margin was 3.46% versus 3.34%. Loan growth and improved asset yields supported results, while higher deposit and borrowing costs partly offset the gains.
- Noninterest income and expenses: Q2 noninterest income was $26.4 million versus $10.8 million, and first-half income was $35.2 million versus $19.8 million. A $13.6 million Q2 holding gain on equity securities—primarily a fintech investment—accounted for most of the increase. Noninterest expense rose to $20.4 million for Q2 and $38.8 million for the first half, from $19.2 million and $36.0 million, respectively. The reported efficiency ratio improved to 49.83% for Q2 and 61.02% for the first half, but was materially aided by the investment valuation gain.
- Cash flow: First-half operating cash flow was negative $29.9 million, investing cash flow negative $5.5 million, and financing cash flow positive $34.3 million. Cash and equivalents decreased $1.0 million to $21.2 million. Mortgage loan originations and sales are significant operating cash-flow items.
Financial position, credit and capital
- Balance sheet at June 30: Total assets were $1.833 billion, up $82.0 million from year-end 2018. Deposits were $1.378 billion, up $68.6 million; noninterest-bearing deposits increased to $270.6 million from $213.6 million. Gross loans were $1.327 billion, up $22.3 million, and loans held for sale were $119.9 million.
- Funding and liquidity: FHLB and other borrowings were $186.9 million, down from $214.9 million at year-end; repurchase agreements were $9.4 million, and subordinated debt was $16.5 million. Management stated current liquidity was adequate and cited access to more than $148.7 million in additional FHLB advances. Approximately $75 million remained available under the company’s shelf registration, subject to authorization and market conditions.
- Credit quality: The allowance for loan losses was $11.2 million, or 0.84% of loans, versus $10.9 million and 0.84% at year-end. Nonperforming loans were $6.8 million, or 0.51% of loans, compared with $9.4 million and 0.78% at June 2018. First-half charge-offs increased to $676,000 from $385,000. Commercial loans represented 74.2% of the loan portfolio. Impaired loans declined to $11.2 million from $12.8 million at year-end, while criticized loans increased.
- Capital: Stockholders’ equity was $200.7 million, or 10.95% of assets. Bank capital ratios included a 10.77% leverage ratio, 13.18% CET1 ratio and 13.97% total risk-based capital ratio. Management reported the company was well-capitalized.
Changes, outlook and risks
- Compared with 2018, earnings rose sharply, chiefly because of the fintech-related equity valuation gain; net interest income also grew with loan balances and yields. Deposit and borrowing costs increased, and operating expenses rose.
- The company recognized a $600,000 pre-tax earn-out receivable from the 2016 sale of substantially all MVB Insurance assets, producing $446,000 of after-tax discontinued-operations income. Management expected payment in Q3 2019.
- On July 10, 2019, the Federal Reserve issued a notice of non-objection to redeem the outstanding convertible subordinated notes; the company stated it intended to notify holders of redemption. The filing reports $12.4 million of those notes outstanding as of June 30.
- Management’s stated priorities are margin improvement, capital leverage, organic loan growth and operating efficiency. Attracting core deposits to fund growth, while protecting margin, remains a key challenge. No quantified earnings or growth guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Risks include interest-rate and funding-cost changes, competition for deposits and loans, economic and real-estate conditions, credit losses, market-value fluctuations in securities and fintech investments, technology and compliance demands, and execution of growth plans. The expected-credit-loss standard (CECL), effective for the company in 2020, could have a material financial-statement impact; its evaluation was still in progress.
- Three defaulted TDR loans totaling $3.7 million were identified as nonperforming. Management said negotiations concerning a third-party operator expected to provide cash flow for a $2.7 million commercial loan were expected to conclude in Q3 2019. Management did not expect ordinary-course legal proceedings to have a significant adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- How much of reported earnings, returns and efficiency improvement depends on the $13.6 million unrealized fintech-equity gain, and how volatile or realizable is that valuation?
- Whether deposit growth—particularly noninterest-bearing and fintech-related balances—can be sustained without further increases in funding costs or reliance on wholesale funding.
- Whether higher charge-offs, increased criticized loans and the defaulted TDR exposures lead to additional provisions or losses.
- Whether the planned redemption of subordinated notes is completed, and its effects on capital, interest expense and liquidity.
- The eventual CECL adoption impact, and the receipt and final amount of the expected USI earn-out payment.