MVB Financial Corp. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars in millions.
Business context and financial position
MVB is a West Virginia bank holding company; MVB Bank is its primary operating entity. The bank provides traditional banking services and focuses lending in five West Virginia counties. It opened a Morgantown office in the second quarter of 2011.
| Metric | September 30, 2011 | December 31, 2010 |
|---|---|---|
| Total assets | $520.2 | $414.3 |
| Total loans | $357.8 | $294.0 |
| Total deposits | $377.9 | $300.4 |
| Stockholders’ equity | $48.2 | $30.8 |
| Cash and cash equivalents | $10.7 | $3.7 |
| Repurchase agreements | $77.8 | $47.6 |
| FHLB and other borrowings | $9.8 | $28.6 |
| Long-term debt | $4.1 | $4.1 |
Results and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $3.693 | $2.823 | $10.153 | $7.789 |
| Provision for loan losses | $0.591 | $0.240 | $1.221 | $0.760 |
| Other income | $0.979 | $0.597 | $2.463 | $1.725 |
| Other expense | $3.152 | $2.335 | $8.653 | $6.664 |
| Net income | $0.673 | $0.620 | $1.975 | $1.555 |
| Diluted earnings per share | $0.30 | $0.38 | $0.91 | $0.96 |
| Net interest margin | 3.23% | 3.01% | 3.17% | 2.88% |
| Efficiency ratio | 67.47% | 68.27% | 68.59% | 70.04% |
For the nine months, operating cash flow was $2.1 million, versus $3.5 million in 2010; investing activities used $98.9 million, versus $65.3 million; financing activities provided $103.8 million, versus $62.0 million. Cash and cash equivalents increased $7.0 million during the period.
At September 30, the reported Tier 1 capital, risk-based capital, and leverage ratios were 15.26%, 16.08%, and 10.40%, respectively. Management said MVB and its bank exceeded minimum capital standards for a “well capitalized” institution. The filing reports an allowance for loan losses of $2.676 million, or 0.75% of loans.
Changes versus comparable periods
- Q3 net income increased $53,000, while nine-month net income increased $420,000. Diluted EPS fell year over year in both periods, alongside higher weighted-average common shares following capital issuance.
- Net interest income grew with loan and balance-sheet expansion. Management cited $80.8 million of Q3 average loan growth and a 42-basis-point reduction in cost of funds; Q3 net interest margin improved 22 basis points.
- Other income increased, including gains on securities sales: $129,000 in Q3 and $485,000 for the nine months, compared with $32,000 and $88,000, respectively. Management attributed the Q3 securities gain partly to a strategy involving agency securities and a steep yield curve.
- Expenses rose with staff and expansion: nine-month salaries and benefits increased $1.3 million, and total other expense rose $2.0 million. The company reported 106 full-time-equivalent employees, compared with 81 a year earlier.
- Loans grew $63.8 million and deposits $77.5 million from year-end. Deposit growth included $45.6 million in public funds. Repurchase agreements increased $30.2 million, while FHLB and other borrowings declined $18.8 million.
Outlook, risks, and unusual items
- Management’s stated priority is attracting core deposits to fund growth in new markets while maintaining customer service and balancing deposit growth with net interest margin. The filing gives no numeric earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Credit quality warrants attention: nonperforming loans were 0.98% of loans, versus 0.82% in September 2010; charge-offs were 0.29% of loans, versus 0.10%. Total past-due loans were $3.8 million, and nonaccrual loans were $3.8 million at September 30. The allowance provision increased year over year.
- Two new troubled debt restructurings were disclosed for the nine months, with post-modification recorded investment of $2.668 million. Commercial loans were the largest portfolio segment; management noted geographic and commercial concentration in its local markets.
- Off-balance-sheet loan commitments were $48.6 million, up from $34.0 million at year-end. The bank reported approximately $117.1 million of remaining FHLB borrowing capacity and access to other funding channels. Management said liquidity needs were met by cash, available funding, and assets maturing within one year.
- MVB received $8.5 million of Small Business Lending Fund preferred capital on September 8, 2011. The stated dividend rate was 1%, subject to continued qualifying loan growth; the company said it could use the capital for four and one-half years at that rate if the condition continued.
- The available-for-sale portfolio had $32,000 of unrealized losses, which management considered temporary; it stated it did not intend to sell the affected securities and believed it could hold them until principal recovery. Forward-looking results remain exposed to economic conditions, interest rates, and competition.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings.
Important facts for investors to verify
- Whether loan growth, delinquency, nonaccrual, charge-off, and allowance trends remain sustainable as the portfolio expands.
- The durability of earnings growth excluding securities-sale gains and considering higher operating costs and loan-loss provisions.
- The composition and stability of deposit growth, including public funds, brokered deposits, CDARS, and repurchase-agreement funding.
- Whether the conditions for maintaining the SBLF preferred-stock dividend rate at 1% continue to be met.
- The terms and utilization of the $48.6 million in loan commitments and the bank’s liquidity under stressed funding conditions.
- The effect of higher share issuance on per-share results; the filing reports 2,234,767 common shares outstanding as of November 14, 2011.