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| MVBF > SEC Filings for MVBF > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
The Private Securities Litigation Reform Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements that involve risk and uncertainty. All statements other than statements of historical fact included in this Form 10-Q including statements in Management's Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. In order to comply with the terms of the safe harbor, the corporation notes that a variety of factors, (e.g., changes in the national and local economies, changes in the interest rate environment, competition, etc.) could cause MVB's actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements.
At June 30, 2012 and 2011 and for the Six and Three Months Ended June 30, 2012 and 2011:
Six Months Ended Three Months Ended
June 30 June 30
2012 2011 2012 2011
Net income to:
Average assets .60 % .60 % .57 % .57 %
Average stockholders' equity 6.97 7.06 6.71 7.62
Net interest margin 3.14 3.13 3.11 3.10
Average stockholders' equity to average assets 8.58 8.48 8.30 8.50
Total loans to total deposits (end of period) 92.65 94.43 92.65 94.43
Allowance for loan losses to total loans (end of period) 0.82 0.80 0.82 0.80
Efficiency ratio 65.84 69.25 67.36 71.30
Capital ratios:
Tier 1 capital ratio 13.65 13.84 13.65 13.84
Risk-based capital ratio 14.55 14.73 14.55 14.73
Leverage ratio 9.34 9.28 9.34 9.28
Cash dividends as a percentage of net income N/A N/A N/A N/A
Per share data:
Book value per common share (end of period) $ 18.33 $ 17.39 $ 18.33 $ 17.39
Market value per common share (end of period)* 22.50 20.00 22.50 20.00
Basic earnings per common share .73 .62 .34 .29
Diluted earnings per common share .71 .61 .33 .29
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* Market value per share is based on MVB's knowledge of certain arms-length transactions in the stock as MVB's common stock is not traded on any market. There may be other transactions involving either higher or lower prices of which MVB is unaware.
Introduction
The following discussion and analysis of the consolidated financial statements of MVB Financial Corp. is presented to provide insight into management's assessment of the financial results. MVB has three wholly-owned second tier holding companies which own 100 percent of MVB Bank, Inc. ("the bank"). The bank is the primary financial entity in this discussion. Unless otherwise noted, this discussion will be in reference to the bank.
MVB Bank, Inc. was chartered by the State of West Virginia and is subject to regulation, supervision, and examination by the Federal Deposit Insurance Corporation and the West Virginia Department of Banking. The bank is not a member of the Federal Reserve System. The bank is a member of the Federal Home Loan Bank of Pittsburgh.
The bank began operations January 4, 1999, at 301 Virginia Avenue in Fairmont, West Virginia. MVB Bank, Inc. provides a full array of financial products and services to its customers, including traditional banking products such as deposit accounts, lending products, debit cards, automated teller machines, and safe deposit rental facilities. The bank opened a banking office in the Shop N Save supermarket in White Hall, WV during the second quarter of 2000. During August of 2005, the bank opened a full-service office at 1000 Johnson Avenue in Bridgeport, WV. In October of 2005 MVB Bank, Inc. purchased an office at 88 Somerset Boulevard in Charles Town, WV. The bank opened a full service office at 651 Foxcroft Avenue in Martinsburg, WV during August 2007. In the second quarter of 2011, MVB opened a banking office at 2400 Cranberry Square in Morgantown, WV.
This discussion and analysis should be read in conjunction with the prior year-end audited financial statements and footnotes thereto included in the Company's filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.
Application of Critical Accounting Policies
MVB's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Application of certain accounting policies inherently requires a greater reliance on the use of estimates, assumptions and judgments and as such, the probability of actual results being materially different from reported estimates is increased. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.
The most significant accounting policies followed by MVB are presented in Note 1 to the audited consolidated financial statements included in MVB's 2011 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in management's discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of estimated future cash flows, estimated losses in pools of homogeneous loans based on historical loss experience of peer banks, estimated losses on specific commercial credits, and consideration of
current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset in the consolidated balance sheet. Note 1 to the consolidated financial statements in MVB's 10-K describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Allowance for Loan Losses section of Management's Discussion and Analysis in this quarterly report on Form 10-Q.
Results of Operations (dollars in thousands)
Overview of the Statement of Income
For the quarter ended June 30, 2012, MVB earned $817 compared to $636 in the second quarter of 2011. Net interest income increased by $857, other income increased by $409 and other expenses increased by $688. The increase in net interest income was driven mainly by the continued growth of the MVB balance sheet, with $91.5 million in average loan growth. Also contributing to the increase in net interest income was a decrease in interest expense of $16, despite an increase in average interest bearing liabilities of $98.1 million. This represented a decreased cost of funds of 29 basis points. The increase in other income was mainly the result of an increase in income on loans held for sale of $458 as a result of additional volume that MVB was able to produce with increased staffing in this area, specifically the Morgantown, WV office opened during the second quarter of 2011. The increase in other operating expenses was principally the result of increased salaries expense of $494, with the addition of the Morgantown office as well as additions in the areas of human resources, information technology, credit and additional staff at MVB's new Operations Center, as well as increases for existing staff. Occupancy, Equipment and depreciation costs increased $52, the result of the additions of the Morgantown office and the Operations Center. Data processing costs increased $60 due to increased volume and increased usage of products available to save time and better automate processes. Advertising expense increased by $95 as MVB focused on the marketing of rewards checking.
Loan loss provisions of $675 and $330 were made for the quarters ended June 30, 2012 and 2011, respectively. The provision for loan losses, which is a product of management's formal quarterly analysis, is recorded in response to inherent risks in the loan portfolio. Continued strong loan demand was the driver of the increased provision.
Non-interest income for the quarters ended June 30, 2012 and 2011 totaled $1.3 million and $864, respectively. The most significant portions of non-interest income are service charges on deposit accounts, which totaled $178 at June 30, 2012, an increase of $15 from the prior year despite significant changes in the regulatory environment and income on loans held for sale which totaled $638, an increase of $458 over the second quarter of 2011, the result of the increased volume from existing lenders as well as the addition of the Morgantown location.
Non-interest expense for the quarters ended June 30, 2012 and 2011 totaled $3.7 million and $3.0 million, respectively. The most significant increases were as discussed above.
For the six months ended June 30, 2011 MVB earned $1.7 million compared to $1.3 million for the same time period in 2011. This $376 increase is mainly the result of balance sheet growth in the areas of loans and investments as discussed above, resulting in an increase in net interest income after provision for loan losses of $1.2 million for the first six months of 2012. MVB's other income increased $823, mainly the result of an increase in income on loans held for sale of $795 and total other expenses increased by $1.5 million, mainly in the areas of salaries, other expense, advertising, occupancy and data processing. Loan loss provisions of $1.3 million and $630 were made for the six months ended June 30, 2012 and 2011, respectively. This increase of $720 was due to continued strong loan demand.
Non-interest income for the six months ended June 30, 2012 and 2011 totaled $2.3 million and $1.5 million, respectively. This $823 increase was primarily the result of income from the sale of loans into the secondary market increasing by $795.
Non-interest expense for the six months ended June 30, 2012 and 2011 totaled $7.0 million and $5.5 million. The largest drivers of this $1.5 million increase were in the areas of salaries, other expenses, advertising, occupancy and data processing.
Interest Income and Expense
Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest-bearing liabilities. Interest-earning assets include loans and investment securities. Interest-bearing liabilities include interest-bearing deposits and repurchase agreements and Federal Home Loan Bank advances. Net interest income is the primary source of revenue for the bank. Changes in market interest rates, as well as changes in the mix and volume of interest-earning assets and interest-bearing liabilities impact net interest income.
Net interest margin is calculated by dividing net interest income by average interest-earning assets. This ratio serves as a performance measurement of the net interest revenue stream generated by the bank's balance sheet. The net interest margin for the quarters ended June 30, 2012 and 2011 was 3.11% and 3.10% respectively. Cost of funds continues to decline, especially in the time deposit area. MVB has been very successful in gathering deposits through the offering of a higher rate NOW account called the broker buster account, as well as through retail rewards checking. Loan yields dropped by 49 basis points as a result of increased competition for high quality credits.
Management continuously monitors the effects of net interest margin on the performance of the bank. Growth and mix of the balance sheet will continue to impact net interest margin in future periods.
Average Balances and Interest Rates
(Unaudited)(Dollars in thousands)
Three Months Ended June 30, 2012 Three Months Ended June 30, 2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
Assets
Interest-bearing deposits in banks $ 3,744 $ 4 0.53 % $ 17,266 $ 10 0.23 %
Certificates of deposit in other banks 9,524 47 1.97 793 3 1.51
Investment securities 114,585 541 1.88 91,354 423 1.85
Loans:
Commercial 244,888 3,001 4.90 199,260 2,633 5.29
Tax exempt 17,149 185 4.32 13,863 145 4.18
Consumer 13,384 196 5.86 13,357 213 6.38
Real estate 135,501 1,437 4.24 92,939 1,143 4.92
Total loans 410,922 4,819 4.69 319,419 4,134 5.18
Total earning assets 538,805 5,411 4.02 428,832 4,570 4.26
Cash and due from banks 9,881 2,264
Other assets 19,972 18,870
Total assets $ 568,658 $ 449,966
Liabilities
Deposits:
Non-interest bearing demand $ 43,557 $ - - % $ 34,103 $ - - %
NOW 180,925 421 0.93 136,047 330 0.97
Money market checking 33,552 42 0.50 38,414 92 0.96
Savings 22,866 33 0.58 13,105 13 0.40
IRAs 9,797 59 2.41 9,950 71 2.85
CDs 135,538 398 1.17 109,697 478 1.74
Repurchase agreements & FFS 69,236 129 0.75 53,842 124 0.92
FHLB and other borrowings 17,300 122 2.82 10,026 115 4.59
Long-term debt 4,124 22 2.13 4,124 20 1.94
Total interest-bearing liabilities 473,338 1,227 1.04 375,205 1,243 1.33
Other liabilities 3,073 2,398
Total liabilities 519,968 411,706
Stockholders' equity
Preferred stock 8,500 -
Common stock 2,237 2,235
Paid-in capital 32,704 32,401
Treasury Stock (1,084 ) (1,006 )
Retained earnings 7,047 5,014
Accumulated other comprehensive income (714 ) (384 )
Total stockholders' equity 48,690 38,260
Total liabilities and stockholders' equity $ 568,658 $ 449,966
Net interest spread 2.98 2.93
Impact of non-interest bearing funds on margin .13 .17
Net interest income-margin $ 4,184 3.11 % $ 3,327 3.10 %
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Average Balances and Interest Rates
(Unaudited)(Dollars in thousands)
Six Months Ended June 30, 2012 Six Months Ended June 30, 2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
Assets
Interest-bearing deposits in banks $ 3,536 $ 5 0.34 % $ 17,071 $ 18 0.21 %
Certificates of deposit in other banks 9,705 104 2.14 4,240 31 1.46
Investment securities 114,064 1,085 1.90 82,313 828 2.01
Loans:
Commercial 240,771 5,993 4.98 193,229 5,083 5.26
Tax exempt 17,188 371 4.32 14,014 293 4.18
Consumer 13,338 401 6.01 13,463 454 6.74
Real estate 132,476 2,829 4.27 89,400 2,201 4.92
Total loans 403,773 9,594 4.75 310,106 8,031 5.18
Total earning assets 531,078 10,790 4.06 413,730 8,908 4.31
Cash and due from banks 10,377 2,511
Other assets 19,940 18,581
Total assets $ 561,395 $ 434,822
Liabilities
Deposits:
Non-interest bearing demand $ 42,245 $ - - % $ 37,970 $ - - %
NOW 180,516 845 0.94 124,024 637 1.03
Money market checking 33,561 85 0.51 38,456 186 0.97
Savings 22,034 63 0.57 12,410 22 0.35
IRAs 9,768 122 2.50 10,104 144 2.85
CDs 134,049 803 1.20 107,564 951 1.77
Repurchase agreements & FFS 67,746 243 0.72 49,471 233 0.94
FHLB and other borrowings 15,827 238 3.01 11,463 235 4.10
Long-term debt 4,124 44 2.13 4,124 40 1.94
Total interest-bearing liabilities 467,625 2,444 1.04 357,616 2,448 1.37
Other liabilities 3,354 2,372
Total liabilities 513,224 397,958
Stockholders' equity
Preferred stock 8,500 -
Common stock 2,236 2,158
Paid-in capital 32,661 31,166
Treasury Stock (1,084 ) (1,006 )
Retained earnings 6,635 4,870
Accumulated other comprehensive income (777 ) (324 )
Total stockholders' equity 48,171 36,864
Total liabilities and stockholders' equity $ 561,395 $ 434,822
Net interest spread 3.02 2.94
Impact of non-interest bearing funds on margin .12 .19
Net interest income-margin $ 8,346 3.14 % $ 6,460 3.13 %
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Non-Interest Income
Service charges on deposit accounts generate the core of the bank's non-interest income. Non-interest income totaled $1.3 million in the second quarter of 2012 compared to $864 in the second quarter of 2011. This increase of $409 is mainly the result of an increase in income in loans held for sale of $458.
Service charges on deposit accounts continue to be the core of MVB's other income and include mainly non-sufficient funds and returned check fees, allowable overdraft fees and service charges on commercial accounts.
The bank is continually searching for ways to increase non-interest income. Income from loans sold in the secondary market continues to be a major area of focus for MVB.
Non-Interest Expense
For the second quarter of 2012, non-interest expense totaled $3.7 million compared to $3.0 million in the second quarter of 2011. MVB's efficiency ratio was 67.36% for the second quarter of 2012 compared to 71.30% for the second quarter of 2011. This ratio measures the efficiency of non-interest expenses incurred in relationship to net interest income plus non-interest income. The increased efficiency ratio is the result of the increased net interest income and increased income from the sale of loans held for sale during the second quarter of 2012.
Salaries and benefits totaled $2.2 million for the quarter ended June 30, 2012 compared to $1.7 million for the quarter ended June 30, 2011. This $494 increase in salaries and benefits is mainly the result of the addition of the Morgantown location, as well as additions in the information technology, human resources, credit and secondary market areas of the bank along with increases to existing employees. MVB had 130 full-time equivalent personnel at June 30, 2012 compared to 103 full-time equivalent personnel as of June 30, 2011. Management will continue to strive to find new ways of increasing efficiencies and leveraging its resources, while effectively optimizing customer service.
For the quarters ended June 30, 2012 and 2011, occupancy expense totaled $209 and $173, respectively. This $36 increase is the result of the addition of the Morgantown office and the Operations Center.
Advertising expense increased $95 as a result of increased focus on rewards checking and data processing expense increased by $60, the result of increased volume as well as the use of more products to better automate processes.
Return on Average Assets and Average Equity
Returns on average assets (ROA) and average equity (ROE) were .57% and 6.71% for the second quarter of 2012 compared to .57% and 7.62% in the second quarter of 2011.
Overview of the Statement of Condition
MVB's interest-earning assets, interest-bearing liabilities, and stockholders' equity changed significantly during the second quarter of 2012 compared to 2011. The most significant areas of change between the quarters ended June 30, 2012 and June 30, 2011 were as follows: investment securities increased from an average balance of $91.3 million to an average balance of $114.6 million, loans increased to an average balance of $410.9 million from $319.4 million, interest-bearing liabilities grew to an average balance of $473.3 million from $375.2 million and stockholders' equity grew by $10.4 million to an average of $48.7 million. These trends reflect the continued growth of MVB in the investment, loan, deposit and capital areas.
Total assets at June 30, 2012 were $588.2 million or an increase of $54.7 million since December 31, 2011. The greatest areas of increase were $50.3 million in loan growth and $44.9 million in interest bearing balances.
Deposits totaled $457.7 million at June 30, 2012 or an increase of $67.2 million . . .
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