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| MVBF > SEC Filings for MVBF > Form 10-Q on 1-Nov-2012 | All Recent SEC Filings |
1-Nov-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 September 30, 2012 and 2011 and for the Nine and Three Months Ended September 30, 2012 and 2011:
Nine Months Ended Three Months Ended
September 30 September 30
2012 2011 2012 2011
Net income to:
Average assets .63% .58% .70% .55%
Average stockholders' equity 7.40 6.94 8.34 6.63
Net interest margin 3.12 3.17 3.09 3.23
Average stockholders' equity to
average assets 8.54 8.37 8.35 8.30
Total loans to total deposits (end of
period) 94.69 94.69 94.69 94.69
Allowance for loan losses to total
loans (end of period) 0.83 0.75 0.83 0.75
Efficiency ratio 64.95 68.59 63.38 67.47
Capital ratios:
Tier 1 capital ratio 13.11 15.26 13.11 15.26
Risk-based capital ratio 14.00 16.08 14.00 16.08
Leverage ratio 9.01 10.40 9.01 10.40
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) $ 18.84 $ 17.77 $ 18.84 $ 17.77
Market value per common share (end of
period)* 24.00 20.00 24.00 20.00
Basic earnings per common share 1.19 .92 .47 .31
Diluted earnings per common share 1.17 .91 .46 .30
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* Market value per common 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. During October 2012 MVB opened a full service office in the downtown area of Clarksburg, WV at 406 West Main Street, in the historic Empire Building.
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 September 30, 2012, MVB earned $1.0 million compared to $673 in the third quarter of 2011. Net interest income increased by $700, other income increased by $704 and other expenses increased by $699. The increase in net interest income was driven mainly by the continued growth of the MVB balance sheet, with $92.5 million in average loan growth. Also contributing to the increase in net interest income was a decrease in interest expense of $7, despite an increase in average interest bearing liabilities of $104.3 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 $300 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, as well as $290 in income from the servicing of mortgage loans sold into the secondary market, a process that MVB began during the third quarter of 2012. The increase in other operating expenses was principally the result of increased salaries expense of $404, with 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 $58, the result of the additions of the Morgantown office and the Operations Center. Advertising expense increased by $108 as MVB focused on the marketing of rewards checking. FDIC insurance increased by $42 as a result of MVB's deposit growth and other expense increased by $42, mostly the result of increased training, travel and entertainment.
Loan loss provisions of $775 and $591 were made for the quarters ended September 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 September 30, 2012 and 2011 totaled $1.7 million and $979, respectively. The most significant portions of non-interest income are service charges on deposit accounts, which totaled $197 at September 30, 2012, an increase of $19 from the prior year despite significant changes in the regulatory environment and income on loans held for sale which totaled $618, an increase of $300 over the third quarter of 2011, the result of the increased volume from existing lenders as well as the addition of the Morgantown location. As a result of the increased mortgage volume, underwriting and title income increased by $77 from the same time period in 2011. Additionally MVB began selling mortgage loans and retaining the servicing in the third quarter of 2012, resulting in $290 in revenues.
Non-interest expense for the quarters ended September 30, 2012 and 2011 totaled $3.9 million and $3.2 million, respectively. The most significant increases were as discussed above.
For the nine months ended September 30, 2011 MVB earned $2.7 million compared to $2.0 million for the same time period in 2011. This $751 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 $1.7 million for the first nine months of 2012. MVB's other income increased $1.5 million, mainly the result of an increase in income on loans held for sale of $1.1 million and the addition of mortgage servicing income. 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 $2.1million and $1.2 million were made for the nine months ended September 30, 2012 and 2011, respectively. This increase of $904 was due to continued strong loan demand.
Non-interest income for the nine months ended September 30, 2012 and 2011 totaled $4.0 million and $2.5 million, respectively. This $1.5 million increase was primarily the result of income from the sale of loans into the secondary market increasing by $1.1 million as well as the addition of mortgage servicing income.
Non-interest expense for the nine months ended September 30, 2012 and 2011 totaled $10.9 million and $8.7 million. The largest drivers of this $2.2 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 September 30, 2012 and 2011 was 3.09% and 3.23% 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 50 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 Sept. 30, 2012 Three Months Ended Sept. 30, 2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
Assets
Interest-bearing deposits in banks $ 10,613 $ 3 0.11% $ 4,959 $ 4 0.32%
Certificates of deposit in other banks 9,427 44 1.82 3,634 7 0.77
Investment securities 112,622 519 1.85 102,375 463 1.81
Loans:
Commercial 261,818 3,178 4.86 214,511 2,834 5.28
Tax exempt 18,732 197 4.21 13,660 142 4.16
Consumer 14,244 203 5.70 13,081 211 6.45
Real estate 141,827 1,474 4.16 105,739 1,260 4.77
Total loans 436,621 5,052 4.63 346,991 4,447 5.13
Total earning assets 569,283 5,618 3.95 457,959 4,921 4.30
Cash and due from banks 11,698 12,135
Other assets 20,979 19,088
Total assets $ 601,960 $ 489,182
Liabilities
Deposits:
Non-interest bearing demand $ 48,979 $ - - % $ 38,823 $ - - %
NOW 221,554 483 0.88 144,253 346 0.96
Money market checking 27,468 21 0.31 35,876 70 0.78
Savings 24,112 36 0.60 14,534 17 0.47
IRAs 9,728 57 2.34 9,886 71 2.87
CDs 137,993 377 1.09 123,128 464 1.51
Repurchase agreements & FFS 61,615 116 0.75 64,342 125 0.78
FHLB and other borrowings 13,521 113 3.34 10,766 115 4.27
Long-term debt 4,124 22 2.13 4,124 20 1.94
Total interest-bearing liabilities 500,115 1,225 0.98 406,909 1,228 1.21
Other liabilities 2,608 2,866
Total liabilities 551,702 448,598
Stockholders' equity
Preferred stock 8,500 1,571
Common stock 2,247 2,234
Paid-in capital 32,954 32,397
Treasury Stock (1,084 ) (1,043 )
Retained earnings 8,172 5,401
Accumulated other comprehensive income (531 ) 24
Total stockholders' equity 50,258 40,584
Total liabilities and
stockholders' equity $ 601,960 $ 489,182
Net interest spread 2.97 3.09
Impact of non-interest bearing funds on margin 0.13 0.14
Net interest income-margin $ 4,393 3.09% $ 3,693 3.23%
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Average Balances and Interest Rates
(Unaudited)(Dollars in thousands)
Nine Months Ended Sept. 30, 2012 Nine Months Ended Sept. 30, 2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
Assets
Interest-bearing deposits in banks $ 5,912 $ 9 0.20% $ 11,760 $ 22 0.25%
Certificates of deposit in other banks 9,611 147 2.04 4,036 38 1.26
Investment securities 113,662 1,606 1.88 89,074 1,291 1.93
Loans:
Commercial 248,103 9,171 4.93 200,447 7,917 5.27
Tax exempt 17,706 568 4.28 13,895 435 4.17
Consumer 13,642 604 5.90 13,334 665 6.65
Real estate 135,616 4,303 4.23 94,906 3,461 4.86
Total loans 415,067 14,646 4.70 322,582 12,478 5.16
Total earning assets 544,252 16,408 4.02 427,452 13,829 4.31
Cash and due from banks 10,821 6,966
Other assets 20,487 18,561
Total assets $ 575,560 $ 452,979
Liabilities
Deposits:
Non-interest bearing demand $ 44,506 $ - - % $ 38,258 $ - - %
NOW 194,295 1329 0.91 130,841 983 1.00
Money market checking 31,515 106 0.45 37,586 256 0.91
Savings 22,732 99 0.58 13,126 39 0.40
IRAs 9,754 179 2.45 10,030 215 2.86
CDs 135,373 1,180 1.16 112,809 1,415 1.67
Repurchase agreements & FFS 65,687 359 0.73 54,483 358 0.88
FHLB and other borrowings 15,052 351 3.11 11,228 350 4.16
Long-term debt 4,124 66 2.13 4,124 60 1.94
Total interest-bearing liabilities 478,532 3,669 1.02 374,227 3,676 1.31
Other liabilities 3,378 2,580
Total liabilities 526,416 415,065
Stockholders' equity
Preferred stock 8,500 529
Common stock 2,240 2,234
Paid-in capital 32,759 31,581
Treasury Stock (1,084 ) (1,019 )
Retained earnings 7,376 4,818
Accumulated other comprehensive income (647 ) (229 )
Total stockholders' equity 49,144 37,914
Total liabilities and
stockholders' equity $ 575,560 $ 452,979
Net interest spread 3.00 3.00
Impact of non-interest bearing funds on margin 0.12 0.17
Net interest income-margin $ 12,739 3.12% $ 10,153 3.17%
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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 $1.7 million in the third quarter of 2012 compared to $979 in the third quarter of 2011. This increase of $704 is mainly the result of an increase in income in loans held for sale of $300, as well as mortgage servicing income.
Service charges on deposit accounts continue to be part of 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 third quarter of 2012, non-interest expense totaled $3.9 million compared to $3.2 million in the third quarter of 2011. MVB's efficiency ratio was 63.38% for the third quarter of 2012 compared to 67.47% for the third 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 third quarter of 2012, along with mortgage servicing income.
Salaries and benefits totaled $2.1 million for the quarter ended September 30, 2012 compared to $1.7 million for the quarter ended September 30, 2011. This $404 increase in salaries and benefits is mainly the result of additions in the information technology, human resources, credit and secondary market areas of the bank along with increases to existing employees. MVB had 139 full-time equivalent personnel at September 30, 2012 compared to 106 full-time equivalent personnel as of September 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 September 30, 2012 and 2011, occupancy expense totaled $207 and $182, respectively. This $25 increase is the result of the addition of the Morgantown office and the Operations Center.
Advertising expense increased $108 as a result of increased focus on rewards checking and other operating and FDIC insurance expense each increased by $42.
Return on Average Assets and Average Equity
Returns on average assets (ROA) and average equity (ROE) were .70% and 8.34% for the third quarter of 2012 compared to .55% and 6.63% in the third quarter of 2011.
Overview of the Statement of Condition
MVB's interest-earning assets, interest-bearing liabilities, and stockholders' equity changed significantly during the third quarter of 2012 compared to 2011. The most significant areas of change between the quarters ended September 30, 2012 and September 30, 2011 were as follows: investment securities increased . . .
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