MVB Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless noted, amounts are in U.S. dollars. MVB is a financial holding company operating primarily through MVB Bank, with CoRe banking, Fintech banking, mortgage banking investments and other businesses.
Financial performance and position
| Metric | Q2 2023 | Comparable period | Six months 2023 | Comparable period |
|---|---|---|---|---|
| Net interest income | $29.6 million | $26.7 million | $62.3 million | $48.5 million |
| Net interest margin, tax-equivalent | 3.80% | 4.10% | 4.09% | 3.63% |
| Noninterest income | $6.4 million | $9.4 million | $9.5 million | $18.7 million |
| Noninterest expense | $30.3 million | $28.0 million | $58.6 million | $55.2 million |
| Net income from continuing operations | $8.0 million | $2.3 million | $10.4 million | $4.2 million |
| Net income attributable to parent | $8.1 million | $3.0 million | $19.5 million | $5.8 million |
| Basic / diluted EPS | $0.64 / $0.63 | $0.24 / $0.23 | $1.54 / $1.50 | $0.48 / $0.45 |
Q2 earnings benefited from higher net interest income and a $4.2 million release of credit-loss allowance, but were offset in part by lower noninterest income and higher operating expenses. Six-month results included an $11.8 million pretax gain on the Chartwell sale, reported in discontinued operations; therefore, total earnings growth was not solely from ongoing operations. Q2 return on average assets/equity was 1.0%/12.0%; six-month figures were 1.2%/14.1%.
- Balance sheet at June 30: Assets $3.35 billion; loans receivable $2.31 billion; deposits $2.96 billion; total stockholders’ equity $274.3 million.
- Liquidity and funding: Cash and cash equivalents rose to $455.8 million from $40.3 million at year-end 2022. Six-month operating, investing and financing cash flows were $30.6 million, $110.0 million and $275.0 million, respectively. Deposits increased $388.5 million; MVB repaid $102.3 million of FHLB and other borrowings and ended June with none outstanding. Remaining FHLB borrowing capacity was reported at $753.1 million.
- Deposits: Total deposits increased $388.5 million from year-end. Noninterest-bearing deposits declined to $987.6 million from $1.23 billion; interest-bearing deposits increased to $1.97 billion from $1.34 billion. Gaming deposits were $362.8 million, including $268.7 million with the three largest gaming clients. Off-balance-sheet deposits associated with gaming, banking-as-a-service and digital-asset clients were $1.1 billion.
- Debt and capital: Subordinated debt was $73.4 million and the senior term loan was $8.8 million. The Bank’s Community Bank Leverage Ratio was 10.0%, above the stated 9% well-capitalized threshold; consolidated equity-to-assets was 8.2%.
- Credit: Allowance for credit losses was $30.3 million, or 1.31% of loans, versus $23.8 million, or 1.00%, at year-end. Nonperforming loans were $13.6 million, or 0.6% of loans. Six-month net charge-offs were $2.9 million, substantially related to subprime auto loans.
- Securities: Available-for-sale securities had $45.9 million of gross unrealized losses at fair value; management attributed the declines to market rather than credit factors and recorded no related credit-loss allowance. Accumulated other comprehensive loss was $34.5 million.
Material changes and management commentary
- Q2 net interest income increased 11% year over year, but tax-equivalent net interest margin fell to 3.80% from 4.10%. Management cited higher funding costs and asset mix, partly offset by higher loan yields. The cost of interest-bearing liabilities rose to 3.29% from 0.47%.
- For the first half, net interest income increased 28.5% and tax-equivalent margin rose to 4.09% from 3.63%, while noninterest income fell by $9.2 million. The company cited lower loan-sale gains, securities-sale losses from portfolio repositioning, and lower equity-method investment gains.
- Loans declined $60.3 million from year-end. The company said it was reducing its subprime auto portfolio; consumer loans fell $79.8 million over the six months. Management expects continued evaluation of options to reduce that portfolio.
- MVB completed the Chartwell sale in February for $14.4 million of consideration in the form of a buyer note, recognizing an $11.8 million gain. It agreed to provide certain transition services and ongoing support for three years.
- In May, MVB ended its planned merger with Integrated Financial Holdings by mutual agreement. It also divested its Flexia interests, ceased consolidating Flexia and recorded a $1.1 million loss.
- MVB adopted CECL on January 1, increasing the allowance for loans and unfunded commitments by $10.0 million before tax effects; the retained-earnings adjustment was $6.6 million. Management’s forecast assumed weaker economic conditions and higher unemployment and delinquencies over the next one to two years.
- Management described liquidity actions taken amid industry volatility, including building cash and using off-balance-sheet deposit networks. It continues to pursue Fintech gaming and payments initiatives, expand treasury services and compliance capacity, and implement cost reductions. The filing provides no quantitative earnings guidance.
Risks, contingencies and unusual items
- Management highlighted potential deposit outflows, higher funding costs, loss of large or concentrated clients, and reduced access to customary liquidity sources amid banking-sector stress. The filing also identifies concentration in gaming deposits and heightened regulatory scrutiny of Fintech and banking-as-a-service activities.
- Commercial and nonresidential real estate are significant loan exposures; healthcare-related loans were 22% of total loans. Credit quality is exposed to economic conditions, collateral values, borrower performance and subprime auto lending.
- The securities portfolio’s unrealized losses could become realized if securities are sold before recovery. The filing says securities were available as a potential liquidity source.
- The company reports ordinary-course legal matters but says it is not aware of material pending proceedings; management and counsel do not expect existing matters to significantly adversely affect the financial statements.
- Three fair-value swaps with $148.5 million total notional were entered into in June to hedge interest-rate risk on fixed-rate mortgages.
Important facts for investors to verify
- How much reported earnings depend on the one-time Chartwell gain, and the timing and collectability of the $14.4 million buyer note.
- Whether deposit balances and funding costs remain stable, particularly for large gaming and other Fintech clients, and how much off-balance-sheet network deposits may shift.
- Trends in net interest margin, deposit pricing and asset yields as rates and funding competition change.
- Credit performance, charge-offs and allowance adequacy under CECL, especially for subprime auto, commercial real estate and healthcare exposures.
- The liquidity implications of the $45.9 million unrealized securities losses and the company’s available borrowing capacity.
- Whether the Bank sustains capital above regulatory thresholds and whether management’s expense and Fintech growth initiatives deliver the expected results.