MVB Financial Corp. — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013 unless noted. MVB operates community and retail banking, mortgage banking through MVB Mortgage, and insurance services. Dollar amounts below are in millions unless otherwise specified.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $6.723 | $5.124 | $20.354 | $14.987 |
| Provision for loan losses | $0.784 | $0.326 | $2.192 | $1.993 |
| Noninterest income | $6.926 | $7.634 | $20.307 | $23.241 |
| Noninterest expense | $12.225 | $11.582 | $35.249 | $31.970 |
| Net income | $0.537 | $0.757 | $2.664 | $3.429 |
| Net income available to common shareholders | $0.393 | $0.736 | $2.477 | $3.365 |
| Diluted EPS | $0.05 | $0.10 | $0.31 | $0.50 |
- Quarterly net interest margin was 2.79%, down from 2.83%; nine-month margin was 2.91%, down from 2.99%. Management attributed pressure to funding costs, including interest on newly issued subordinated debt, and competitive pressure on loan yields.
- Q3 return on average assets was 0.20% versus 0.37%; return on average equity was 1.95% versus 3.70%. The efficiency ratio was 89.57% versus 90.78% for Q3; the nine-month ratio was 86.69% versus 83.63%.
- Total assets were $1,086.8; loans were $762.9 gross ($756.6 net), up from $622.3 gross at year-end; deposits were $846.3, up from $695.8. Cash and cash equivalents were $62.5, versus $39.8.
- Nine-month cash provided by operating activities was $42.1, investing activities used $115.7, and financing activities provided $96.2. Cash increased $22.7 during the period.
- At September 30, liabilities included $33.9 of repurchase agreements, $55.5 of FHLB and other borrowings, and $33.5 of subordinated debt. The company issued $29.4 of convertible subordinated notes in June, generally bearing 7%–7.5% interest and maturing in 2024.
- Capital ratios reported were 15.20% Tier 1, 16.09% risk-based capital, and 11.12% leverage. Stockholders’ equity was $110.7, up from $94.0 at year-end.
Changes, outlook, and risks
- Net income fell year over year despite higher net interest income, as noninterest income declined and expenses and loan-loss provision increased. For the nine months, gain on loans held for sale declined $3.7, reflecting lower loan production; the prior-year period also included a $0.626 gain on sale of a subsidiary.
- Insurance income rose to $2.553 for the nine months from $0.781, which the company attributed to expanded staffing and products after MVB Insurance became a direct subsidiary in June 2013. Salaries and employee benefits, occupancy, equipment, and data-processing costs also increased amid growth and new offices.
- The allowance for loan losses was $6.364, or 0.83% of loans, versus $4.935 at year-end. Nine-month charge-offs were $0.776 versus $1.506 in 2013. Nonperforming loans to total loans were 0.62% in September 2014 versus 0.16% a year earlier. Management cited loan growth and charge-offs in explaining the higher quarterly provision.
- Management said liquidity was adequate, citing cash, maturing assets, funding sources, and access to more than $206.7 of additional FHLB advances. Outstanding loan commitments were $156.8, compared with $92.3 at year-end.
- Management’s priorities are margin improvement, use of capital, organic loan growth, and operating efficiency; attracting core deposits to fund expansion was identified as a key challenge. No quantitative earnings or revenue guidance was provided. Results for the interim period are not necessarily indicative of full-year results.
- After quarter-end, on October 31, the company and bank mutually terminated a proposed CFG Community Bank asset-and-liability purchase for $30, subject to regulatory approval. The parties reported no continuing obligations or liability under the terminated agreement.
- The pension plan was frozen effective May 31, 2014; management expected the freeze to reduce pension costs by approximately $0.430 in the second half of 2014. The filing describes broad risks including credit quality, interest rates, competition, economic conditions, regulation, funding and execution of growth plans.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no legal proceedings believed likely to have a material adverse effect.
Key facts for investors to verify
- Whether loan growth and deposit growth can be sustained while preserving loan quality, core funding, and net interest margin.
- Trends in nonperforming loans, criticized commercial credits, charge-offs, and the adequacy of the allowance as the portfolio expands.
- Mortgage production and gain-on-sale income, and the durability of insurance income, given their importance to noninterest revenue.
- The cost and terms of the $29.4 million convertible notes, potential dilution from conversion, and the effect of subordinated-debt expense on earnings and margins.
- Actual liquidity and capital capacity under changing funding conditions, including reliance on wholesale and brokered funding and the reported availability of additional FHLB advances.
- The effects of the CFG agreement’s termination and whether any subsequent strategic transaction or related costs arise.