MVB Financial Corp. — Q1 2016 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are with December 31, 2015. MVB operates commercial and retail banking, mortgage banking, and insurance businesses, primarily in West Virginia and Virginia.
Key financial results
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.433 billion | $1.384 billion at Dec. 31, 2015 |
| Total loans | $1.076 billion | $1.032 billion at Dec. 31, 2015 |
| Total deposits | $1.092 billion | $1.012 billion at Dec. 31, 2015 |
| Net interest income | $10.695 million | $7.547 million in Q1 2015 |
| Noninterest income | $9.676 million | $11.399 million in Q1 2015 |
| Noninterest expense | $17.134 million | $14.955 million in Q1 2015 |
| Net income | $1.796 million; $0.20 diluted EPS | $2.103 million; $0.24 diluted EPS in Q1 2015 |
| Net interest margin | 3.36% | 2.95% in Q1 2015 |
| Efficiency ratio | 84.11% | 82.42% in Q1 2015 |
| Cash and cash equivalents | $28.726 million | $29.133 million at Dec. 31, 2015 |
| Stockholders’ equity | $117.065 million | $114.712 million at Dec. 31, 2015 |
Material changes and financial condition
- Net income declined $307,000 year over year despite $3.148 million higher net interest income. Total operating revenue was $23.058 million versus $21.037 million.
- Loan growth drove higher interest income: average loans rose $240.4 million year over year. Net interest margin increased 41 basis points, including a $662,000 recovery of previously unrecognized interest on one commercial relationship.
- Noninterest income fell $1.723 million, principally due to $1.848 million lower derivative gains and $581,000 lower insurance and investment-services income. Mortgage fee income increased $476,000 and securities-sale gains increased $260,000.
- Noninterest expense increased $2.179 million, including $1.526 million higher salaries and benefits. Management cited staffing, office expansion, incentive compensation, technology and mortgage processing costs; the financial holding company segment included a $500,000 reorganization expense.
- Cash flow was $7.900 million provided by operating activities, $52.399 million used in investing activities, and $44.092 million provided by financing activities. Cash decreased $407,000 during the quarter. Deposit growth of $79.254 million was partly offset by a $36.908 million reduction in short-term FHLB borrowings.
- Borrowings included $146.267 million of FHLB and other borrowings, $29.561 million of repurchase agreements, and $33.524 million of subordinated debt. FHLB short-term borrowings were $143.008 million, down from $179.917 million at year-end. Management reported access to more than $211.5 million of additional FHLB advances.
- The allowance for loan losses was $8.447 million, or 0.79% of loans, versus $8.006 million, or 0.78%, at year-end. Q1 provision was $625,000; charge-offs were $191,000. Nonperforming loans were 0.77% of loans, and impaired loans totaled $12.426 million, down from $15.375 million at year-end.
- The Bank’s reported capital ratios were 10.76% Tier 1 and CET1, 11.48% risk-based capital, and 9.34% leverage. Risk-based capital declined from 12.19% at year-end, mainly after $84.8 million of acquisition and development loans were classified as high-volatility commercial real estate. Management said it was pursuing loan-agreement changes to potentially reduce some risk weighting.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management highlighted margin improvement, capital leverage, organic loan growth, and operating efficiency as priorities; attracting core deposits to fund growth is described as a key challenge.
- Management stated that liquidity needs were met by cash, available funding sources, and assets maturing within a year. It also cautioned that access to capital markets on acceptable terms is not assured.
- On March 9, 2016, the dividend rate on the $8.5 million Small Business Lending Fund preferred stock increased from 1% to 9%, and remains at 9% until retired. This may raise future preferred-dividend costs.
- MVB reclassified $52.4 million of held-to-maturity securities to available-for-sale following a change in its capital-treatment rationale; there were no held-to-maturity securities remaining at March 31. The reclassification included $1.8 million of unrealized gains.
- Credit risks include commercial real estate concentration (70.1% of loans were reported as nonresidential real estate loans), local-market economic weakness, and troubled restructurings. TDRs totaled $9.2 million; $2.4 million related to three loans in default under restructured terms. The filing identifies an impaired commercial real estate loan tied to extended stabilization and insufficient project cash flow.
- Other stated risks include interest-rate and market conditions, competition for deposits and quality loans, regulatory and capital requirements, and mortgage pipeline and derivative volatility. Management reported no material change in market risk since year-end, no material change in risk factors, and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth and deposit gathering can continue without further margin pressure or higher funding costs.
- Credit quality trends, including criticized and nonperforming exposures, TDR defaults, commercial real estate concentration, and the adequacy of the loan-loss allowance.
- The effect of HVCRE classifications and any loan-contract amendments on regulatory capital ratios and lending capacity.
- The future earnings impact of the SBLF dividend-rate increase to 9%, preferred dividends, and convertible subordinated debt dilution.
- How mortgage production, derivative marks, insurance revenue, and increased operating costs affect recurring profitability.
- Management’s liquidity assumptions and continued availability of FHLB, brokered-deposit, and other contingent funding sources.