MVB Financial Corp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013 unless otherwise stated. Unaudited consolidated results include MVB Bank, MVB Mortgage and MVB Insurance. Dollar amounts below are in millions unless noted.
Business context
MVB is a West Virginia-based financial holding company focused on community banking, mortgage banking and insurance services. The company continued to expand its loan and deposit base and was pursuing the acquisition of CFG Community Bank.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Interest income | $8.250 | $6.176 | Up $2.074 |
| Net interest income | $6.744 | $4.864 | Up $1.880 |
| Provision for loan losses | $0.519 | $1.000 | Lower; charge-offs were $0.009 vs. $0.502 |
| Noninterest income | $6.007 | $6.984 | Down $0.977 |
| Noninterest expense | $10.836 | $9.405 | Up $1.431 |
| Income before taxes | $1.396 | $1.443 | Down $0.047 |
| Net income | $1.158 | $1.188 | Down $0.030 |
| Net income available to common shareholders | $1.137 | $1.167 | Basic EPS $0.15 vs. $0.20; diluted EPS $0.15 vs. $0.19 |
| Net interest margin | 3.05% | 2.96% | Up 9 basis points |
| Efficiency ratio | 84.98% | 79.38% | Higher, indicating weaker cost efficiency |
| Return on average assets / equity | 0.47% / 4.88% | 0.65% / 6.93% | Both declined |
Mortgage-related income remained significant: gains on loans held for sale were $3.784 million, down from $4.928 million, reflecting lower production. Insurance income contributed $0.958 million, a business line added in 2013. Higher salaries, occupancy and data-processing costs reflected added offices, staffing and operations. Q1 2014 acquisition-related costs were $0.115 million.
Balance sheet, liquidity and capital
- Total assets were $997.4 million, up $10.4 million from year-end. Gross loans rose $53.3 million to $675.6 million; deposits increased $58.8 million to $754.6 million.
- Cash and cash equivalents were $32.6 million, down from $39.8 million. Q1 operating cash flow was $35.9 million, investing cash flow was negative $51.5 million and financing cash flow was positive $8.3 million.
- Investment securities totaled $161.4 million. Securities in unrealized loss positions had aggregate unrealized losses of $3.872 million; management characterized these as temporary and said it had the intent and ability to hold them until recovery.
- Repurchase agreements were $71.5 million; FHLB and other borrowings were $60.5 million, including $53.9 million in short-term FHLB borrowings. Subordinated debt was $4.1 million. Management reported access to more than $302.5 million of additional FHLB advances.
- Stockholders’ equity was $99.3 million. Reported capital ratios were 11.81% Tier 1, 12.66% risk-based and 8.55% leverage; management said Company and Bank ratios exceeded minimums for well-capitalized institutions.
Credit quality and material changes
- The allowance for loan losses was $5.451 million, or 0.81% of loans, versus 1.02% at March 31, 2013. The filing attributes the lower ratio in part to commercial loans purchased in late 2013 and recorded at fair value.
- Nonperforming loans were reported at 0.64% of loans, compared with 0.66% a year earlier. However, total loans 30 days or more past due increased to $23.6 million from $3.2 million at year-end; nonaccrual loans were $0.607 million and 90-days-past-due still accruing were $3.704 million.
- Impaired loans totaled $7.628 million; $3.694 million were nonperforming and the remainder were performing under restructured terms. The company reported no defaults among TDRs.
- Average loans grew $178.7 million year over year, while average interest-bearing liabilities rose $216.3 million. Average interest-bearing funding cost declined, supporting margin improvement, but expense growth and weaker mortgage activity offset much of the revenue gains.
Outlook, transactions and risks
Management provided no specific numerical earnings guidance. It identified attracting core deposits to fund growth in new markets as a key challenge and emphasized customer service, product quality and technology. Results for the quarter are not necessarily indicative of full-year results.
- The pending CFG Community Bank transaction would involve $30 million of consideration—$26 million cash and $4 million in MVB common shares, subject to adjustments and customary closing conditions, including regulatory approvals. It would add three branches and another office in Maryland. The filing does not state that the transaction had closed.
- At March 31, the company had received subscriptions for $12.4 million of subordinated notes and $0.5 million of preferred stock; the funds were in escrow, with a single closing expected in Q2 2014. It also reported $3.8 million of additional common-stock subscriptions during Q1 for the acquisition and growth.
- Loan commitments were $134.9 million, up from $92.3 million at year-end. The filing cites risks including economic and market conditions, interest rates, credit quality, deposit competition, regulatory changes, technology and acquisition execution/integration.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It disclosed no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether CFG received required approvals and closed, and the final purchase price, funding mix and integration costs.
- Whether the marked increase in past-due loans persists and how criticized, impaired and restructured loans develop; review subsequent allowance provisions and charge-offs.
- Whether mortgage origination volume and gains recover, and whether new insurance income can offset mortgage-related volatility.
- Whether deposit growth is durable and cost-effective, given rising interest-bearing deposits and reliance on wholesale funding.
- Whether expense growth moderates and the efficiency ratio improves; assess the dilution and terms associated with the capital offerings.