MVB Financial Corp. — Q3 2013 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2013, compared with the same 2012 periods. MVB operates community banking, mortgage banking and insurance businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial and operating results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $4.712m | $4.393m | $13.788m | $12.739m |
| Non-interest income | $8.046m | $1.683m | $24.440m | $3.990m |
| Non-interest expense | $11.582m | $3.851m | $31.970m | $10.865m |
| Net income | $0.757m | $1.048m | $3.429m | $2.726m |
| Net income available to common shareholders | $0.736m | $1.027m | $3.365m | $2.611m |
| Diluted EPS | $0.21 | $0.46 | $0.99 | $1.17 |
| Net interest margin | 2.78% | 3.11% | 2.94% | 3.15%* |
*The detailed average-balance table gives 3.15% for nine months 2012, while the MD&A summary table reports 3.12%; verify the reported comparative margin. Q3 2012 margin is 3.11% in the detailed table and 3.09% in the summary.
- Balance sheet at September 30: Assets were $853.1m, up from $726.8m at December 31, 2012. Gross loans were $522.1m, versus $446.4m; deposits were $620.0m, versus $486.5m; and stockholders’ equity was $82.9m, versus $67.5m.
- Liquidity and funding: Cash and cash equivalents were $27.1m, up from $21.6m at year-end. Repurchase agreements were $86.1m; FHLB and other borrowings were $52.2m; subordinated debt was $4.1m. MVB reported approximately $209.5m of remaining FHLB borrowing capacity.
- Cash flows, nine months: Operating activities provided $39.6m; investing activities used $157.5m; financing activities provided $123.4m. Cash increased $5.5m to $27.1m. Mortgage-loan originations and sales contributed substantially to operating cash flow.
- Credit: Provision for loan losses was $2.0m for nine months, and the allowance was $4.7m, or 0.90% of gross loans, compared with 0.83% a year earlier. Nonperforming loans were 0.16% of loans in September 2013 versus 0.77% in September 2012. The filing reports $270,000 of nonperforming loans; most other impaired loans were performing TDRs.
- Capital and returns: Reported Tier 1, risk-based capital and leverage ratios were 12.46%, 13.28% and 8.65%, respectively; management said the Company and Bank exceeded well-capitalized minimums. Q3 ROA and ROE were 0.37% and 3.70%, versus 0.70% and 8.34%. Q3 efficiency ratio rose to 90.78% from 63.38%.
Material changes versus prior comparable periods
- Q3 net income fell to $0.757m from $1.048m, despite a $0.319m increase in net interest income: non-interest expense grew by $7.731m, exceeding the $6.363m increase in non-interest income.
- Mortgage banking was the principal driver of higher non-interest income. Income on loans held for sale was $5.623m in Q3 and $18.385m for nine months, compared with $0.618m and $1.686m, respectively, in 2012. MVB attributed the increase to higher volume, including PMG, acquired in late 2012.
- Expense growth reflected PMG, expanded branch operations and staffing. Q3 salary and benefits expense rose to $7.215m from $2.129m; full-time equivalent employees increased to 292 from 139 a year earlier.
- Loan growth and lower funding costs supported net interest income, but margin declined. Management cited a 46-basis-point lower loan yield in Q3, partly offset by a 20-basis-point reduction in cost of funds.
- Common share count increased materially following equity issuance; diluted weighted-average shares were 3.57m in Q3 2013 versus 2.25m in Q3 2012. This contributed to lower per-share earnings even as nine-month net income increased.
Outlook, risks and unusual items
- Management identified attracting core deposits to fund growth as a key future challenge and emphasized customer service, products and technology. No numerical earnings or revenue guidance was provided.
- On October 23, 2013, after quarter-end, MVB agreed to acquire certain CFG Community Bank assets and assume certain liabilities for approximately $30m in cash and common shares. Closing remained subject to regulatory approvals and other conditions; the transaction would add three branches and another office in Maryland.
- PMG sold 25% of its 50% interest in Lender Service Provider, LLC, generating a $0.626m gain; it also recorded $0.423m of derivative gains for the nine-month period. Q3 derivative results were a $0.276m loss. Insurance commissions of $0.781m were a new revenue stream in 2013.
- Available-for-sale and held-to-maturity securities had $4.918m of aggregate unrealized losses at September 30, 2013. Management considered the declines temporary, stated it did not intend to sell and believed it could hold the securities to recover principal. Accumulated other comprehensive loss increased to $2.899m from $1.495m at year-end.
- Risks discussed include interest-rate and market changes, credit deterioration, deposit competition and funding needs, regulatory and capital requirements, acquisition execution and integration, and economic conditions. Loan-loss allowance estimates require significant judgment. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q3.
Important facts for investors to verify
- Reconcile the inconsistent comparative net interest margin figures in the filing (2012 nine-month and Q3 values differ between the detailed tables and summary table).
- Assess whether mortgage-sale income and expanded mortgage operations can be sustained, and how associated staffing and processing costs affect profitability and efficiency.
- Review asset quality, criticized and restructured loans, allowance adequacy, and the effect of loan growth on credit risk.
- Confirm the amount and terms of equity issued: the notes describe 1,132,527 shares and $27.2m from an offering completed in March, while MD&A cites 559,264 shares and $13.4m issued during the period.
- Monitor CFG transaction approvals, consideration and integration, along with liquidity, deposit mix and borrowing usage.