MVB FINANCIAL CORP quarterly report, Q3 FY2018

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MVB Financial Corp. — Q3 2018 Form 10-Q

Business context and period. MVB Financial 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 nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017 unless otherwise noted. Amounts below are in U.S. dollars.

Financial results and position

  • Q3 earnings: Net income was $3.6 million, versus $2.3 million in Q3 2017; net income available to common shareholders was $3.5 million. Diluted EPS was $0.29, compared with $0.21. The quarterly common dividend declared was $0.03 per share.
  • Nine-month earnings: Net income was $9.0 million versus $6.2 million; net income available to common shareholders was $8.6 million. Basic and diluted EPS were $0.80 and $0.77, respectively, compared with $0.56 for both measures in 2017.
  • Income and margins: Q3 net interest income rose to $13.5 million from $11.4 million; nine-month net interest income was $37.6 million versus $32.6 million. Net interest margin increased to 3.43% for Q3 from 3.37%, and to 3.37% year to date from 3.29%. Nine-month noninterest income was $30.3 million, slightly below $30.5 million a year earlier; noninterest expense rose to $54.4 million from $52.8 million.
  • Profitability and efficiency: Nine-month return on average assets was 0.75% versus 0.57%, and return on average equity was 7.65% versus 5.73%. The efficiency ratio improved to 80.02% from 83.57% year to date; Q3 was 76.63% versus 83.28%.
  • Balance sheet: Total assets were $1.723 billion, up from $1.534 billion. Loans were $1.296 billion, up from $1.106 billion; deposits were $1.379 billion, up from $1.160 billion. Stockholders’ equity was $170.9 million, up from $150.2 million.
  • Cash flow and liquidity: For the first nine months, operating activities provided $13.2 million of cash, investing activities used $195.0 million, and financing activities provided $183.5 million. Cash and cash equivalents were $22.0 million at quarter-end. Management said liquidity was adequate and cited access to more than $205.6 million in additional FHLB advances, other funding sources, and available-for-sale securities.
  • Debt and capital: FHLB and other borrowings were $122.0 million, down from $152.2 million; subordinated debt was $18.5 million, down from $33.5 million. In June, $12.7 million of subordinated debt converted into 795,500 common shares. Reported capital ratios included a 9.91% leverage ratio, 11.27% common equity Tier 1, 12.15% Tier 1 risk-based, and 14.10% total risk-based capital.

Material changes versus comparable periods

  • Earnings improved year over year, principally as loan growth and higher yields lifted net interest income. Management cited $112.6 million growth in average loans and loans held for sale over the first nine months and an increase in loan yields.
  • Higher funding costs partly offset asset yield gains: nine-month interest expense increased to $12.5 million from $8.9 million, reflecting higher balances and rates on deposits and borrowings. Management noted ongoing pressure from rising rates and competitive loan and deposit pricing.
  • Mortgage fee income fell to $24.6 million from $28.6 million for the first nine months, as mortgage production volume declined 5.2%. Gains on derivatives improved by $2.7 million and partly offset that decline.
  • Loan-loss provision increased to $2.1 million from $1.1 million for the first nine months. Nonperforming loans rose to $12.8 million, or 0.99% of loans, from $6.6 million, or 0.60%, at September 2017. The allowance for loan losses was $11.4 million, or 0.88% of loans.
  • Available-for-sale securities had $8.0 million of gross unrealized losses at quarter-end, versus $2.5 million at year-end 2017. Accumulated other comprehensive loss widened to $8.7 million from $3.0 million; management characterized the securities declines as temporary and said it did not intend, and was unlikely to be required, to sell before recovery.

Outlook, commentary, risks, and unusual items

  • Management identified margin improvement, leveraging capital, organic loan growth, and operating efficiency as priorities. It emphasized attracting core deposits to fund growth. The filing gives no numerical earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
  • Management’s interest-rate simulation, based on June 30, 2018 assumptions, projected a 2.4% increase in net interest income over 12 months for an immediate 100-basis-point rate increase, a 3.8% increase for a 200-basis-point increase, and a 1.7% decrease for a 100-basis-point decrease. Actual results may differ.
  • Credit items warrant attention: $3.7 million of TDRs represented three loans to two borrowers in default under restructured terms, including a $3.2 million commercial term loan that defaulted in Q3. Management said negotiations over a prospective third-party operating arrangement were expected to conclude in Q4 2018. The bank also reported $1.7 million of other real estate owned and $1.7 million in recorded investment in two mortgage loans in foreclosure.
  • Other notable items included a $300,000 bank-owned life insurance death benefit and a $583,000 year-to-date holding gain on equity securities. The company early adopted guidance reclassifying $646,000 of stranded tax effects from AOCI to retained earnings; it also adopted new equity-investment fair-value guidance, with no material overall impact reported.
  • Risks cited include credit quality, commercial real estate and geographic concentration, rising funding costs and interest-rate sensitivity, mortgage-market and derivative valuation changes, competition, economic conditions, regulation, technology and cybersecurity, and the ability to execute growth plans. Management reported no material change in risk factors, no known legal matter expected to materially adversely affect results, and effective disclosure controls.

Important facts for investors to verify

  • Whether loan growth and net interest margin can be sustained as deposit and borrowing costs rise, and as the company seeks additional core deposits.
  • Trends in nonperforming loans, criticized credits, TDR defaults, foreclosures, charge-offs, and the adequacy of the allowance—especially given the commercial concentration.
  • Mortgage production, fee income, and the volatility and assumptions underlying derivative gains and hedges.
  • The duration and potential realized impact of securities’ unrealized losses, and the effect of market-rate changes on liquidity and capital.
  • Capital and per-share effects of debt and preferred-stock conversion rights, share issuance, and potential dilution; also confirm the company’s capacity to maintain dividends.
  • Implementation effects of upcoming accounting standards, particularly expected lease balance-sheet recognition and the credit-loss standard scheduled for 2020.