MVB Financial Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results include MVB Bank, MVB Mortgage and MVB Insurance. Dollar amounts below are in millions unless otherwise indicated.
Business context and financial performance
MVB is a West Virginia-based financial holding company with community banking, mortgage banking and insurance operations. It reported net income of $2.103 million, up from $1.158 million in Q1 2014. Net income available to common shareholders was $1.961 million; diluted EPS was $0.24, compared with $1.137 million and $0.15, respectively.
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $7.547 million | $6.996 million in Q1 2014 |
| Net interest margin | 2.95% | 3.15% in Q1 2014 |
| Noninterest income | $11.411 million | $5.756 million in Q1 2014 |
| Noninterest expense | $14.967 million | $10.837 million in Q1 2014 |
| Total assets | $1,194.973 million | $1,110.459 million at Dec. 31, 2014 |
| Total loans | $831.285 million | $798.297 million at Dec. 31, 2014 |
| Deposits | $866.308 million | $823.227 million at Dec. 31, 2014 |
| Cash and cash equivalents | $26.545 million | $30.077 million at Dec. 31, 2014 |
| Allowance for loan losses | $6.481 million; 0.78% of loans | $6.223 million; 0.78% at Dec. 31, 2014 |
| Book value per share | $11.86 | $11.43 in Q1 2014 |
Annualized return on average assets was 0.75% versus 0.47%; return on average equity was 7.67% versus 4.88%. The efficiency ratio improved to 82.42% from 84.98%. Capital ratios at March 31 were 12.94% Tier 1, 13.64% risk-based, 11.19% leverage and 12.94% Common Equity Tier 1.
Cash flow, funding and debt
Operating activities used $50.628 million of cash, versus $35.901 million provided in Q1 2014; management’s cash-flow statement shows substantial mortgage loan originations for sale and loan-sale proceeds. Investing activities used $33.248 million, while financing activities provided $80.344 million, including $43.081 million of deposit growth and a $43.997 million increase in short-term FHLB borrowings. Cash declined $3.532 million during the quarter.
At quarter-end, FHLB and other borrowings were $145.243 million, repurchase agreements $26.122 million and subordinated debt $33.524 million. Management cited more than $224 million of additional FHLB borrowing capacity and other wholesale funding sources, and stated it believed liquidity was adequate. Loans were 95.96% of deposits, compared with 89.52% in Q1 2014.
Material changes and management commentary
- Net income rose by $0.945 million year over year. Noninterest income increased $5.655 million, led by mortgage fee income, derivatives gains and insurance and investment services income. Mortgage fee income was $6.309 million versus $3.210 million; gain on derivatives was $2.249 million versus $0.335 million.
- Mortgage origination volume increased 126% year over year; management attributed higher mortgage and derivatives income to increased production, expanded markets and lower interest rates. Refinances represented 61% of mortgage production versus 19% a year earlier.
- Noninterest expense rose $4.130 million, including higher compensation, staffing, occupancy, technology and mortgage-processing costs. Average loan balances increased $172.1 million year over year.
- Net interest margin fell 20 basis points. Management attributed pressure mainly to a 23-basis-point increase in funding costs, including interest on the $29.4 million convertible subordinated notes issued in June 2014.
- Management’s stated priorities are margin improvement, capital leverage, organic loan growth and operating efficiency. It identified attracting core deposits to fund growth as a key challenge. No specific numerical earnings or revenue guidance was provided; management cautioned Q1 results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Credit quality warrants monitoring: nonperforming loans to total loans were 1.07% in March 2015 versus 0.64% a year earlier. Q1 charge-offs were $423,000 versus $8,000, and the loan-loss provision was $659,000 versus $519,000.
- Impaired loans were $14.164 million at March 31. Management identified a $3.3 million commercial loan exposed to coal-industry conditions and a commercial real estate loan with approximately $5.0 million outstanding, whose government-contractor tenants vacated after losing contracts. The Bank alleges the seller breached the loan-sale agreement and is pursuing legal recourse.
- Investment securities had $675,000 of gross unrealized losses. Management considered the declines temporary and said it intended and had the ability to hold the securities until principal recovery.
- Commitments to extend credit totaled $191.1 million, up from $143.2 million at year-end. The allowance for loan losses and fair values of certain assets rely on management estimates and, in some cases, less observable inputs.
- On May 1, 2015, after quarter-end, MVB Bank announced an agreement to acquire two Susquehanna Bank branches in Berkeley County, West Virginia, and assume approximately $69 million of deposits and $17 million of loans, subject to customary conditions including regulatory approvals.
- The filing reports no legal proceedings believed likely to have a material adverse effect, while separately disclosing the loan-sale dispute noted above. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage production, refinancing and derivatives gains remain strong, and how sensitive earnings are to interest rates and mortgage volumes.
- Whether loan growth can be funded with core deposits without further margin compression or increased reliance on wholesale borrowings.
- Developments in the coal-related and Northern Virginia commercial real estate credits, related collateral and legal recovery, and trends in nonperforming loans and charge-offs.
- The actual closing, regulatory approvals and financial effects of the announced branch transaction.
- Capital and liquidity measures, including the availability and terms of borrowing facilities and obligations on subordinated debt and preferred stock.