United States
Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q/A

 

(Mark One)

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

o                   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                  .

 

Commission File number 000-50567

 

MVB Financial Corp.

(Exact name of registrant as specified in its charter)

 

West Virginia

 

20-0034461

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

301 Virginia Avenue

Fairmont, West Virginia  26554-2777

(Address of principal executive offices)

 

304-363-4800

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant has (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  o  No  x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

As of May 15, 2014, the number of shares outstanding of the issuer’s only class of outstanding common stock was 8,025,409.

 

 

 



Table of Contents

 

Explanatory Note

 

MVB Financial Corp. (the “Company”) is filing this Form 10-Q/A as an amendment (the “Amendment”) to the Company’s Current Report on Form 10-Q which reported quarterly results and activities pursuant for the period ending March 31, 2014, which was filed with the Securities and Exchange Commission on May 15, 2014 (the “Original 10-Q”).  This Amendment No. 1 to the Original 10-Q is being filed to update Part II, Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds) with the information contained  in the Original 10-Q in Note 7 of Part I, Item 2 (Financial Statements), as this information for Part II, Item 2, which should have been identical to Note 7 of Part I, Item 2, was inadvertently omitted in the initial filing.

 

Except for the foregoing, this Amendment does not amend the Original 10-Q in any way and does not modify or update any other disclosures contained in the Original 10-Q.  Accordingly, this Amendment should be read in conjunction with the Original 10-Q.

 



Table of Contents

 

MVB Financial Corp.

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

The unaudited interim consolidated financial statements of MVB Financial Corp. (“the Company” or “MVB”) and subsidiaries (“Subsidiaries”) including MVB Bank, Inc. (the “Bank” or “MVB Bank”) and its wholly-owned subsidiary MVB Mortgage and MVB Insurance, LLC (“MVB Insurance”) listed below are included on pages 3-27 of this report.

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

 

 

 

 

 

Consolidated Statements of Income for the Three Months ended March 31, 2014 and 2013

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2014 and 2013

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and 2013

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations are included on pages 28-41 of this report.

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 



Table of Contents

 

Part I. Financial Information

 

Item 1. Financial Statements

 

MVB Financial Corp. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands except per share data)

 

 

 

March 31

 

December 31

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

(Note 1)

 

Assets

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Cash and due from banks

 

$

17,294

 

$

28,907

 

Interest bearing balances

 

15,318

 

10,936

 

Total cash and cash equivalents

 

32,612

 

39,843

 

Certificates of deposits in other banks

 

9,427

 

9,427

 

Investment securities:

 

 

 

 

 

Securities available-for-sale

 

104,592

 

106,411

 

Securities held-to-maturity (fair value of $55,741 for 2014 and $54,118 for 2013)

 

56,823

 

56,670

 

Loans held for sale

 

50,201

 

89,186

 

Loans:

 

675,558

 

622,305

 

Less: Allowance for loan losses

 

(5,451

)

(4,935

)

Net loans

 

670,107

 

617,370

 

Bank premises, furniture and equipment

 

18,926

 

16,919

 

Bank owned life insurance

 

16,219

 

16,062

 

Accrued interest receivable and other assets

 

20,739

 

17,393

 

Goodwill

 

17,779

 

17,779

 

Total assets

 

$

997,425

 

$

987,060

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

56,834

 

$

63,336

 

Interest bearing

 

697,806

 

632,475

 

Total deposits

 

754,640

 

695,811

 

 

 

 

 

 

 

Accrued interest, taxes and other liabilities

 

7,372

 

6,878

 

Repurchase agreements

 

71,498

 

81,578

 

FHLB and other borrowings

 

60,480

 

104,647

 

Subordinated debt

 

4,124

 

4,124

 

Total liabilities

 

898,114

 

893,038

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, par value $1,000, 20,000 shares authorized and 8,500 shares issued

 

8,500

 

8,500

 

Common stock, par value $1, 10,000,000 shares authorized; 7,946,818 and 7,705,894 shares issued; and 7,844,664 and 7,603,740 shares outstanding in 2014 and 2013, respectively

 

7,947

 

7,706

 

Additional paid-in capital

 

73,190

 

69,601

 

Retained earnings

 

14,480

 

13,343

 

Accumulated other comprehensive loss

 

(2,639

)

(2,961

)

Treasury stock, 102,154 shares, at cost

 

(2,167

)

(2,167

)

Total stockholders’ equity

 

99,311

 

94,022

 

Total liabilities and stockholders’ equity

 

$

997,425

 

$

987,060

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

MVB Financial Corp. and Subsidiaries

Consolidated Statements of Income

(Unaudited) (Dollars in thousands except per share data)

 

 

 

Three Months Ended

 

 

 

March 31

 

 

 

2014

 

2013

 

Interest income

 

 

 

 

 

Interest and fees on loans

 

$

7,039

 

$

5,370

 

Interest on deposits with other banks

 

46

 

45

 

Interest on investment securities — taxable

 

411

 

279

 

Interest on tax exempt loans and securities

 

754

 

482

 

Total interest income

 

8,250

 

6,176

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Deposits

 

1,098

 

907

 

Repurchase agreements

 

126

 

123

 

FHLB and other borrowings

 

263

 

262

 

Subordinated debt

 

19

 

20

 

Total interest expense

 

1,506

 

1,312

 

Net interest income

 

6,744

 

4,864

 

Provision for loan losses

 

519

 

1,000

 

Net interest income after provision for loan losses

 

6,225

 

3,864

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

Service charges on deposit accounts

 

120

 

137

 

Gain on bank owned life insurance

 

128

 

92

 

Visa debit card income

 

152

 

123

 

Gain on loans held for sale

 

3,784

 

4,928

 

Capitalized servicing retained income

 

156

 

338

 

Insurance income

 

958

 

 

Gain on sale of securities

 

 

1

 

Gain on derivative

 

335

 

877

 

Other operating income

 

374

 

488

 

Total noninterest income

 

6,007

 

6,984

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

Salary and employee benefits

 

6,797

 

6,220

 

Occupancy expense

 

617

 

430

 

Equipment depreciation and maintenance

 

372

 

328

 

Data processing

 

380

 

205

 

Mortgage processing

 

546

 

507

 

Visa debit card expense

 

138

 

102

 

Advertising

 

280

 

236

 

Legal and accounting fees

 

220

 

202

 

Printing, stationery and supplies

 

115

 

88

 

Consulting fees

 

211

 

120

 

FDIC insurance

 

150

 

139

 

Travel

 

154

 

85

 

Other operating expenses

 

856

 

743

 

Total noninterest expense

 

10,836

 

9,405

 

Income before income taxes

 

1,396

 

1,443

 

Income tax expense

 

238

 

255

 

Net income

 

$

1,158

 

$

1,188

 

Preferred dividends

 

21

 

21

 

Net income available to common shareholders

 

$

1,137

 

$

1,167

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.15

 

$

0.20

 

Earnings per share - diluted

 

$

0.15

 

$

0.19

 

Weighted average shares outstanding - basic

 

7,606,661

 

5,851,094

 

Weighted average shares outstanding - diluted

 

7,828,143

 

5,986,684

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

MVB Financial Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net Income

 

$

1,158

 

$

1,188

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) during the year

 

537

 

(33

)

 

 

 

 

 

 

Income tax effect

 

(215

)

13

 

 

 

 

 

 

 

Reclassification adjustment for gain recognized in income

 

 

(1

)

 

 

 

 

 

 

Income tax effect

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

322

 

(21

)

 

 

 

 

 

 

Comprehensive income

 

$

1,480

 

$

1,167

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

MVB Financial Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited) (Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31

 

March 31

 

 

 

2014

 

2013

 

Operating activities

 

 

 

 

 

Net income

 

$

1,158

 

$

1,188

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net amortization and accretion of investments

 

224

 

270

 

Net amortization of deferred loan (fees) cost

 

73

 

(16

)

Provision for loan losses

 

519

 

1,000

 

Depreciation and amortization

 

289

 

194

 

Stock based compensation

 

58

 

36

 

Loans originated for sale

 

(148,480

)

(239,958

)

Proceeds of loans sold

 

191,249

 

257,189

 

Gain on sale of loans held for resale

 

(3,784

)

(5,097

)

Gain on sale of investment securities

 

 

(1

)

Income on bank owned life insurance

 

(128

)

(92

)

Deferred taxes

 

(645

)

(188

)

Other, net

 

(4,632

)

(4,019

)

Net cash provided by operating activities

 

35,901

 

10,506

 

Investing activities

 

 

 

 

 

Purchases of investment securities available-for-sale

 

 

(3,226

)

Purchases of investment securities held-to-maturity

 

(250

)

 

Maturities/paydowns of investment securities available-for-sale

 

2,416

 

2,943

 

Sales of investment securities available-for-sale

 

 

2,045

 

Purchases of premises and equipment

 

(2,296

)

(1,665

)

Net increase in loans

 

(53,327

)

(10,560

)

Purchases of restricted bank stock

 

(2,773

)

(1,762

)

Redemptions of restricted bank stock

 

4,710

 

516

 

Proceeds from sale of other real estate owned

 

57

 

 

Net cash used in investing activities

 

(51,463

)

(11,709

)

Financing activities

 

 

 

 

 

Net increase in deposits

 

58,828

 

33,744

 

Net decrease in repurchase agreements

 

(10,080

)

(473

)

Net change in short-term FHLB borrowings

 

(44,128

)

(16,394

)

Principal payments on FHLB borrowings

 

(39

)

(2,801

)

Proceeds from stock offering

 

3,723

 

13,419

 

Common stock options exercised

 

48

 

 

Cash dividends paid on preferred stock

 

(21

)

(21

)

Net cash provided by financing activities

 

8,331

 

27,474

 

(Decrease) increase in cash and cash equivalents

 

(7,231

)

26,271

 

Cash and cash equivalents at beginning of period

 

39,843

 

25,340

 

Cash and cash equivalents at end of period

 

$

32,612

 

$

51,611

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Loans transferred to other real estate owned

 

$

 

$

472

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

Interest

 

$

1,539

 

$

1,222

 

Income taxes

 

$

465

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

MVB Financial Corp. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1 — Basis of Presentation

 

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q.  Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, have been included and are of a normal, recurring nature. The balance sheet as of December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.  Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

The accounting and reporting policies of MVB Financial Corp. (“the Company” or “MVB”) and its subsidiaries (“Subsidiaries”), including MVB Bank, Inc. (the “Bank”), the Bank’s subsidiary MVB Mortgage and MVB Insurance, LLC, conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change.  Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The consolidated balance sheet as of December 31, 2013 has been extracted from audited financial statements included in the Company’s 2013 filing on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in MVB’s December 31, 2013, Form 10-K filed with the Securities and Exchange Commission.

 

In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. In addition, all share amounts have been revised to reflect the two for one stock split effected as a stock dividend as disclosed in Note 12.

 

Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.

 

Note 2 — Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on MVB Financials Corp’s Consolidated Financial Statements.

 

7



Table of Contents

 

Note 3 — Investments

 

Amortized cost and fair values of investment securities held-to-maturity at March 31, 2014, including gross unrealized gains and losses, are summarized as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(in thousands)

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

56,823

 

$

691

 

$

(1,773

)

$

55,741

 

Total investment securities held—to-maturity

 

$

56,823

 

$

691

 

$

(1,773

)

$

55,741

 

 

Amortized cost and fair values of investment securities held-to-maturity at December 31, 2013, including gross unrealized gains and losses, are summarized as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(in thousands)

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

$

56,670

 

$

367

 

$

(2,919

)

$

54,118

 

Total investment securities held—to-maturity

 

$

56,670

 

$

367

 

$

(2,919

)

$

54,118

 

 

Amortized cost and fair values of investment securities available-for-sale at March 31, 2014 are summarized as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(in thousands)

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities

 

$

60,732

 

$

12

 

$

(1,480

)

$

59,264

 

U.S. Sponsored Mortgage-backed securities

 

44,785

 

165

 

(619

)

44,331

 

Total debt securities

 

105,517

 

177

 

(2,099

)

103,595

 

Equity and other securities

 

810

 

187

 

 

997

 

Total investment securities available-for-sale

 

$

106,327

 

$

364

 

$

(2,099

)

$

104,592

 

 

Amortized cost and fair values of investment securities available-for-sale at December 31, 2013 are summarized as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(in thousands)

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities

 

$

60,744

 

$

 

$

(1,922

)

$

58,822

 

U.S. Sponsored Mortgage-backed securities

 

47,317

 

118

 

(843

)

46,592

 

Total debt securities

 

108,061

 

118

 

(2,765

)

105,414

 

Equity and other securities

 

810

 

187

 

 

997

 

Total investment securities available-for-sale

 

$

108,871

 

$

305

 

$

(2,765

)

$

106,411

 

 

8



Table of Contents

 

The following tables summarize amortized cost and fair values of debt securities by maturity:

 

 

 

March 31, 2014

 

 

 

Held to Maturity

 

Available for sale

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Within one year

 

$

 

$

 

$

 

$

 

After one year, but within five

 

1,696

 

1,736

 

34,457

 

34,066

 

After five years, but within ten

 

14,877

 

14,910

 

37,087

 

36,066

 

After ten years

 

40,250

 

39,095

 

33,973

 

33,463

 

Total

 

$

56,823

 

$

55,741

 

$

105,517

 

$

103,595

 

 

Investment securities with a carrying value of $154,958 at March 31, 2014, were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve discount window.

 

The Company’s investment portfolio includes securities that are in an unrealized loss position as of March 31, 2014, the details of which are included in the following table.  Although these securities, if sold at March 31, 2014 would result in a pretax loss of $3,872, the Company has no intent to sell the applicable securities at such market values, and maintains the Company has the ability to hold these securities until all principal has been recovered.  Declines in the market values of these securities can be traced to general market conditions which reflect the prospect for the economy as a whole.  When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated.  As of March 31, 2014, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline in market value.

 

The following table discloses investments in an unrealized loss position at March 31, 2014:

(in thousands)

 

 

 

Less than 12 months

 

12 months or more

 

Description and number
of positions

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities (17)

 

$

51,599

 

$

(1,480

)

$

 

$

 

U.S. Sponsored Mortgage-backed securities (16)

 

11,095

 

(72

)

18,799

 

(547

)

Municipal securities (83)

 

24,021

 

(1,242

)

7,544

 

(531

)

 

 

$

86,715

 

$

(2,794

)

$

26,343

 

$

(1,078

)

 

9



Table of Contents

 

The following table discloses investments in an unrealized loss position at December 31, 2013:

(in thousands)

 

 

 

Less than 12 months

 

12 months or more

 

Description and number
of positions

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities (19)

 

$

58,822

 

$

(1,922

)

$

 

$

 

U.S. Sponsored Mortgage-backed securities (18)

 

14,969

 

(113

)

19,781

 

(730

)

Municipal securities (103)

 

35,502

 

(2,535

)

4,471

 

(384

)

 

 

$

109,293

 

$

(4,570

)

$

24,252

 

$

(1,114

)

 

There were no sales of investments available-for-sale during the three month period ended March 31, 2014. The Company sold investments available-for-sale of $2.0 million for the three months ended March 31, 2013,resulting in a gross gain of $1.

 

Note 4 — Loans and Allowance for Loan Losses

 

The following table summarizes the primary segments of the allowance for loan losses (“ALL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2014.  Activity in the allowance is presented for the periods indicated (in thousands):

 

 

 

 

 

 

 

Home

 

 

 

Credit

 

 

 

 

 

Commercial

 

Residential

 

Equity

 

Installment

 

Card

 

Total

 

ALL balance December 31, 2013

 

$

3,609

 

$

519

 

$

554

 

$

239

 

$

14

 

$

4,935

 

Charge-offs

 

 

 

 

(9

)

 

(9

)

Recoveries

 

2

 

 

1

 

3

 

 

6

 

Provision

 

291

 

227

 

 

 

1

 

519

 

ALL balance March 31, 2014

 

$

3,902

 

$

746

 

$

555

 

$

233

 

$

15

 

$

5,451

 

Individually evaluated for impairment

 

$

1,358

 

$

302

 

$

29

 

$

8

 

$

2

 

$

1,699

 

Collectively evaluated for impairment

 

$

2,544

 

$

444

 

$

526

 

$

225

 

$

13

 

$

3,752

 

 

 

 

 

 

 

 

Home

 

 

 

Credit

 

 

 

 

 

Commercial

 

Residential

 

Equity

 

Installment

 

Card

 

Total

 

ALL balance December 31, 2012

 

$

3,107

 

$

514

 

$

242

 

$

200

 

$

13

 

$

4,076

 

Charge-offs

 

(500

)

(2

)

 

 

 

(502

)

Recoveries

 

22

 

36

 

7

 

 

 

65

 

Provision

 

1,016

 

(58

)

22

 

16

 

4

 

1,000

 

ALL balance March 31, 2013

 

$

3,645

 

$

490

 

$

271

 

$

216

 

$

17

 

$

4,639

 

Individually evaluated for impairment

 

$

668

 

$

35

 

$

 

$

1

 

$

 

$

704

 

Collectively evaluated for impairment

 

$

2,977

 

$

455

 

$

271

 

$

215

 

$

17

 

$

3,935

 

 

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Table of Contents

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates.  Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. As of March 31, 2014 and 2013, net deferred fees and costs of $1,613 and $974, respectively, were included in the carryings value of loans.

 

During late 2013, the Bank purchased $74.3 million in commercial loans in the northern Virginia area, that were marked to fair value at the time they were recorded on the balance sheet.

 

The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2014:

 

(in thousands)

 

Commercial

 

Residential

 

Home
Equity

 

Installment

 

Credit
Cards

 

Total

 

Individually evaluated for impairment

 

$

6,739

 

$

843

 

$

29

 

$

15

 

$

2

 

$

7,628

 

Collectively evaluated for impairment

 

481,282

 

137,278

 

31,194

 

17,517

 

659

 

667,930

 

Total Loans

 

$

488,021

 

$

138,121

 

$

31,223

 

$

17,532

 

$

661

 

$

675,558

 

 

The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2013 (in thousands):

 

(in thousands)

 

Commercial

 

Residential

 

Home
Equity

 

Installment

 

Credit
Cards

 

Total

 

Individually evaluated for impairment

 

$

52,206

 

$

1,875

 

$

 

$

34

 

$

 

$

54,115

 

Collectively evaluated for impairment

 

262,727

 

103,033

 

18,926

 

17,200

 

581

 

402,467

 

Total Loans

 

$

314,933

 

$

104,908

 

$

18,926

 

$

17,234

 

$

581

 

$

456,582

 

 

Of the $7,628 in impaired loans presented above, $3,694 were non-performing loans as of March 31, 2014. The remaining $3,934 represents troubled debt restructured loans that are performing under modified terms.

 

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Table of Contents

 

Bank management evaluates individual loans in all of the commercial segments for possible impairment.  Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by Bank management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Bank management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Bank also separately evaluates individual consumer and residential mortgage loans for impairment.

 

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. 

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

Impaired

 

 

 

 

 

 

 

 

 

 

 

Loans with

 

 

 

 

 

 

 

Impaired Loans with

 

No Specific

 

 

 

 

 

Specific Allowance

 

Allowance

 

Total Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

Recorded

 

Related

 

Recorded

 

Recorded

 

Principal

 

 

 

Investment

 

Allowance

 

Investment

 

Investment

 

Balance

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6,619

 

$

1,358

 

$

120

 

$

6,739

 

$

6,739

 

Residential

 

843

 

302

 

 

843

 

843

 

Home Equity

 

29

 

29

 

 

29

 

29

 

Installment

 

15

 

8

 

 

15

 

15

 

Credit Cards

 

2

 

2

 

 

2

 

2

 

Total impaired loans

 

$

7,508

 

$

1,699

 

$

120

 

$

7,628

 

$

7,628

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

6,134

 

$

1,243

 

$

120

 

$

6,254

 

$

6,254

 

Residential

 

261

 

175

 

 

261

 

261

 

Home Equity

 

28

 

28

 

 

28

 

28

 

Installment

 

24

 

11

 

68

 

92

 

92

 

Credit Cards

 

1

 

1

 

 

1

 

1

 

Total impaired loans

 

$

6,448

 

$

1,458

 

$

188

 

$

6,636

 

$

6,636

 

 

12



Table of Contents

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands):

 

 

 

Three months ended

 

 

 

March 31

 

 

 

2014

 

2013

 

Average investment in impaired loans:

 

 

 

 

 

Commercial

 

$

6,414

 

$

4,575

 

Residential

 

584

 

413

 

Home Equity

 

28

 

 

Installment

 

43

 

21

 

Credit Cards

 

1

 

 

Total Average investment in impaired loans

 

$

7,070

 

$

5,009

 

 

 

 

 

 

 

Interest income recognized on an accrual basis on impaired loans

 

$

69

 

$

24

 

Interest income recognized on a cash basis on impaired loans

 

$

36

 

$

20

 

 

Bank management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio.  The first six categories are considered not criticized, and are aggregated as “Pass” rated.  The criticized rating categories utilized by Bank management generally follow bank regulatory definitions.  The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.  The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Doubtful category.  Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis.  The Bank’s Credit Department performs an annual review of all commercial relationships $1,000,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio.  The Bank engages an external consultant to conduct loan reviews on at least an annual basis.  Generally, the external consultant reviews larger commercial relationships or criticized relationships.  The Bank’s Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

468,904

 

$

10,764

 

$

8,115

 

$

238

 

$

488,021

 

Residential

 

135,226

 

1,768

 

930

 

197

 

138,121

 

Home Equity

 

31,088

 

106

 

29

 

 

31,223

 

Installment

 

16,892

 

625

 

15

 

 

17,532

 

Credit Cards

 

659

 

 

2

 

 

661

 

Total

 

$

652,769

 

$

13,263

 

$

9,091

 

$

435

 

$

675,558

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

437,474

 

$

11,566

 

$

8,348

 

$

 

$

457,388

 

Residential

 

115,283

 

2,660

 

261

 

 

118,204

 

Home Equity

 

27,662

 

107

 

28

 

 

27,797

 

Installment

 

17,579

 

614

 

92

 

 

18,285

 

Credit Cards

 

628

 

2

 

1

 

 

631

 

Total

 

$

598,626

 

$

14,949

 

$

8,730

 

$

 

$

622,305

 

 

13



Table of Contents

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

 

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 

 

60-89

 

Days +

 

Total

 

 

 

 

 

90+ Days

 

 

 

 

 

Days

 

Days

 

Past

 

Past

 

Total

 

Non-

 

Still 

 

 

 

Current

 

Past Due

 

Past Due

 

Due

 

Due

 

Loans

 

Accrual

 

 Accruing

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

467,932

 

$

16,237

 

$

76

 

$

3,776

 

$

20,089

 

$

488,021

 

$

381

 

$

3,417

 

Residential

 

134,792

 

2,818

 

 

511

 

3,329

 

$

138,121

 

226

 

285

 

Home Equity

 

31,203

 

20

 

 

 

20

 

$

31,223

 

 

 

Installment

 

17,413

 

85

 

34

 

 

119

 

$

17,532

 

 

 

Credit Cards

 

659

 

 

 

2

 

2

 

$

661

 

 

2

 

Total

 

$

651,999

 

$

19,160

 

$

110

 

$

4,289

 

$

23,559

 

$

675,558

 

$

607

 

$

3,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

456,580

 

$

216

 

$

24

 

$

568

 

$

808

 

$

457,388

 

$

284

 

$

 

Residential

 

116,121

 

1,401

 

193

 

489

 

2,083

 

$

118,204

 

29

 

431

 

Home Equity

 

27,741

 

28

 

 

28

 

56

 

$

27,797

 

 

28

 

Installment

 

18,043

 

90

 

 

152

 

242

 

$

18,285

 

76

 

 

Credit Cards

 

628

 

2

 

 

1

 

3

 

$

631

 

 

1

 

Total

 

$

619,113

 

$

1,737

 

$

217

 

$

1,238

 

$

3,192

 

$

622,305

 

$

389

 

$

460

 

 

14



Table of Contents

 

The ALL is maintained to absorb losses from the loan portfolio.  The ALL is based on the Bank management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the two components represents the Bank’s ALL.

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualified factors.

 

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis.  Company and Bank management track the historical net charge-off activity at the call code level.  A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters.  Commercial, Mortgage and Consumer pools currently utilize a rolling 12 quarters.

 

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors.    Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

 

Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are:  national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volume and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

 

Historically, management has utilized an internally developed spreadsheet to track and apply the various components of the allowance.

 

15



Table of Contents

 

Troubled Debt Restructurings

 

The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.  Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.  Troubled debt restructurings during 2014 and 2013 are set forth in the following table.  No TDR’s have defaulted.

 

At March 31, 2014 and December 31, 2013, the Bank had specific reserve allocations for TDR’s of $1.6 million and $1.4 million, respectively.

 

The following table presents details related to loans identified as Troubled Debt Restructurings (“TDRs”) for the three months ended March 31, 2014 and March 31, 2013 (in thousands):

 

 

 

New TDRs (1)

 

 

 

For the Three Months Ended

 

For the Three Months Ended

 

 

 

March 31, 2014

 

March 31, 2013

 

 

 

Number of
Contracts

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

Number
of
Contracts

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

Commercial

 

1

 

$

496

 

$

496

 

2

 

$

1,695

 

$

1,695

 

Residential real estate

 

1

 

389

 

389

 

 

 

 

Consumer

 

 

 

 

3

 

8

 

8

 

Total

 

2

 

$

885

 

$

885

 

5

 

$

1,703

 

$

1,703

 

 


(1)                   The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.

 

16



Table of Contents

 

NOTE 5 - BORROWED FUNDS

 

Short-term Borrowings and Repurchase Agreements

 

Along with traditional deposits, the Bank has access to both overnight repurchase agreements and short-term borrowings from FHLB to fund its operations and investments. As of March 31, 2014 and December 31, 2013, the Bank had repurchase agreements of $71.5 million and $81.6 million, respectively. Short-term borrowings from FHLB totaled $53.9 million at March 31, 2014, compared to $98.0 million at December 31, 2013.

 

Information related to short-term borrowings and repurchase agreements is summarized below:

 

(Dollars in thousands)

 

March 31,
2014

 

March 31,
2013

 

 

 

 

 

 

 

Balance at end of period

 

$

125,398

 

$

128,856

 

Average balance during the three months ended

 

135,779

 

90,514

 

Maximum month-end balance

 

160,737

 

128,856

 

Weighted-average rate during the three months ended

 

0.96

%

0.70

%

Rate at end of period

 

0.96

%

1.31

%

 

Average balances in the table above were calculated using daily averages for the related accounts.

 

Term notes from the FHLB were as follows:

 

March 31

 

Dec 31

 

(Dollars in thousands)

 

2014

 

2013

 

Fixed interest rate notes, originating between April 1999 and December 2007, due between April 2014 and April 2022, interest of between 4.50% and 5.90% payable monthly

 

$

5,724

 

$

5,759

 

 

 

 

 

 

 

Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly installments of $5, including interest of 5.22%

 

856

 

860

 

 

 

 

 

 

 

 

 

$

6,580

 

$

6,619

 

 

Subordinated Debt

 

In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the “Trust”).  The Company established the trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust.  The proceeds from the sale of the Trust Preferred Securities were loaned to the Company under subordinated Debentures (the “Debentures”) issued to the Trust pursuant to an Indenture.  The Debentures

 

17



Table of Contents

 

are the only asset of the Trust.  The Trust Preferred Securities have been issued to a pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations.  The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees.  The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s Tier I capital.

 

The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012.  Interest payments are due in March, June, September and December and are adjusted at the interest due dates at a rate of 1.62% over the three month LIBOR Rate.  The Company reflects borrowed funds in the amount of $4.1 million as of March 31, 2014 and December 31, 2013 and interest expense of $19 and $20 for the 3 months ended March 31, 2014 and 2013.

 

A summary of maturities of borrowings over the next five years is as follows:

 

(dollars in thousands)

 

Year

 

Amount

 

2014

 

$

55,021

 

2015

 

169

 

2016

 

1,246

 

2017

 

1,470

 

2018

 

81

 

Thereafter

 

6,617

 

 

 

$

64,604

 

 

In addition to the Trust Preferred Securities and the Debentures, during the first quarter of 2014, the Company initiated and advanced a solicitation of subordinated promissory notes and preferred stock that is explained in greater detail in Note 7.

 

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Note 6 — Fair Value of Financial Instruments

 

The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

 

Level I:  Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:    Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:    Assets and liabilities that have little to no pricing observability as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company classified investments in government securities as Level 2 instruments and valued them using the market approach.  All measurements are made on a recurring basis, with the exception of loans held for sale, derivative on loans held for sale, other real estate and impaired loans, which are measured on a non-recurring basis.

 

The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2014 and December 31, 2013 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

March 31, 2014

 

(in thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

U.S. Government Agency Securities

 

$

 

$

59,264

 

$

 

$

59,264

 

U.S. Sponsored Mortgage backed securities

 

 

44,331

 

 

44,331

 

Equity and Other Securities

 

187

 

810

 

 

 

997

 

 

 

 

December 31, 2013

 

(in thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

U.S. Government Agency Securities

 

$

 

$

58,822

 

$

 

$

58,822

 

U.S. Sponsored Mortgage backed securities

 

 

46,592

 

 

46,592

 

Equity and Other Securities

 

187

 

810

 

 

997

 

 

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during 2014

 

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and 2013 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense.

 

·                  Loans held for sale — Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level II).

 

·                  Derivative on loans held for sale - Derivatives on loans held for sale are used to mitigate interest rate risk for residential mortgage loans held for sale and interest rate locks. These instruments are considered derivatives and are recorded at fair value, based on (i) committed sales prices from investors for commitments to sell mortgage loans or (ii) observable market data inputs for commitments to sell mortgage backed securities. The Company’s mortgage banking hedge instruments are classified as Level II.  For mortgage interest rate locks, the fair value is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s mortgage interest rate locks are classified as Level II.

 

·                  Impaired Loans - Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

 

·                  Other Real Estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.

 

Assets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013 are included in the table below:

 

 

 

March 31, 2014

 

(in thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

$

50,201

 

$

 

$

50,201

 

Derivative on loans held for sale

 

 

2,607

 

 

2,607

 

Impaired loans

 

 

 

5,929

 

5,929

 

Other real estate owned

 

 

 

375

 

375

 

 

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Table of Contents

 

 

 

December 31, 2013

 

(in thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

$

89,186

 

$

 

$

89,186

 

Derivative on loans held for sale

 

 

2,271

 

 

2,271

 

Impaired loans

 

 

 

5,178

 

5,178

 

Other real estate owned

 

 

 

375

 

375

 

 

The following tables present quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013.

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

(Dollars in thousands)

 

Fair Value

 

Valuation
Technique

 

Unobservable
Input

 

Range

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

5,929

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

20% - 30%

 

 

 

 

 

 

 

Liquidation expense (2)

 

5% - 10%

 

Other real estate owned

 

$

375

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

20% - 30%

 

 

 

 

 

 

 

Liquidation expense (2)

 

5% - 10%

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

(Dollars in thousands)

 

Fair Value

 

Valuation
Technique

 

Unobservable
Input

 

Range

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

5,178

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

20% - 30%

 

 

 

 

 

 

 

Liquidation expense (2)

 

5% - 10%

 

Other real estate owned

 

$

375

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

20% - 30%

 

 

 

 

 

 

 

Liquidation expense (2)

 

5% - 10%

 

 


(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not observable.

(2)  Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

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The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.

 

Cash and cash equivalents: The carrying amounts for cash and cash equivalents approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

 

Certificates of deposits: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality.  No prepayments of principal are assumed.

 

Securities:  Fair values of securities are based on quoted market prices, where available.  If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.

 

Loans:  The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality.  No prepayments of principal are assumed.

 

Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level II).

 

Derivative on loans held for sale: Derivatives on loans held for sale are used to mitigate interest rate risk for residential mortgage loans held for sale and interest rate locks. These instruments are considered derivatives and are recorded at fair value, based on (i) committed sales prices from investors for commitments to sell mortgage loans or (ii) observable market data inputs for commitments to sell mortgage backed securities. The Company’s mortgage banking hedge instruments are classified as Level II.  For mortgage interest rate locks, the fair value is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s mortgage interest rate locks are classified as Level II.

 

Accrued interest receivable and payable and repurchase agreements:  The carrying values of accrued interest receivable and payable approximate their fair values.

 

Deposits:  The fair values of demand deposits (i.e., non-interest bearing checking, NOW and money market), savings accounts and other variable rate deposits approximate their carrying values.  Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities.  Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.

 

FHLB and other borrowings: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality.  No prepayments of principal are assumed.

 

Subordinated debt: The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality.  No prepayments of principal are assumed.

 

Off-balance sheet instruments:  The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties.  The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.

 

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Table of Contents

 

The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows (in thousands):

 

Fair Value Measurements at:

 

March 31, 2014

 

Carrying
Value

 

Estimated
Fair
Value

 

Quoted Prices
in
Active
Markets For
Identical
Assets (Level
1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,612

 

$

32,612

 

$

32,612

 

$

 

$

 

Certificates of deposits with other banks

 

9,427

 

10,013

 

 

 

10,013

 

Securities available-for-sale

 

104,592

 

104,592

 

187

 

104,405

 

 

Securities held-to-maturity

 

56,823

 

55,741

 

 

55,741

 

 

Loans held for sale

 

50,201

 

50,201

 

 

50,201

 

 

Loans, net

 

670,107

 

675,767

 

 

 

675,767

 

Derivative on loans held for sale

 

2,607

 

2,607

 

 

2,607

 

 

Accrued interest receivable

 

2,715

 

2,715

 

 

2,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

754,640

 

$

755,359

 

$

 

$

508,509

 

$

246,850

 

Repurchase agreements

 

71,498

 

71,498

 

 

71,498

 

 

FHLB and other borrowings

 

60,480

 

60,520

 

 

53,900

 

6,620

 

Accrued interest payable

 

294

 

294

 

 

294

 

 

Subordinated debt

 

4,124

 

4,124

 

 

4,124

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,843

 

$

39,843

 

$

39,843

 

$

 

$

 

Certificates of deposits with other banks

 

9,427

 

9,616

 

 

 

9,616

 

Securities available-for-sale

 

106,411

 

106,411

 

187

 

106,224

 

 

Securities held-to-maturity

 

56,670

 

54,118

 

 

54,118

 

 

Loans held for sale

 

89,186

 

89,186

 

 

89,186

 

 

Loans, net

 

617,370

 

620,295

 

 

 

620,295

 

Derivative on loans held for sale

 

2,271

 

2,271

 

 

2,271

 

 

Accrued interest receivable

 

2,764

 

2,764

 

 

2,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

695,811

 

$

697,301

 

$

 

$

454,658

 

$

242,643

 

Repurchase agreements

 

81,578

 

81,578

 

 

81,578

 

 

FHLB and other borrowings

 

104,647

 

104,742

 

 

98,028

 

6,714

 

Accrued interest payable

 

327

 

327

 

 

327

 

 

Subordinated debt

 

4,124

 

4,124

 

 

4,124

 

 

 

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Table of Contents

 

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.  Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

 

Note 7 — Stock and Debt Offerings

 

During the first quarter of 2014, the Company began a private offering under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) of subordinated promissory notes and preferred stock.  During the first quarter of 2014, the Company received subscriptions for subordinated promissory notes totaling $12.4 million.  In addition, during the same period, the Company received subscriptions for five-hundred preferred stock shares totaling $500 in additional capital.  As of March 31, 2014, the Company had not issued any notes on shares of preferred stock, and subscribers’ funds have been placed in an escrow account.  A single scheduled closing will occur in the second quarter of 2014 whereby the escrowed funds will be released.  The proceeds of these subordinated debt and preferred stock offerings will be used in connection with the acquisition of CFG Community Bank and continued growth of the Company and its Subsidiaries.

 

During 2013, the Company commenced a private offering under Rule 506 of Regulation D of its common stock to accredited investors.  As of December 31, 2013, the Company had received subscriptions for 610,194 common stock shares totaling $9.8 million in additional capital.  During the first quarter of 2014, the Company received additional subscriptions for 236,524 common stock shares totaling $3.8 million in additional capital at March 31, 2014.  The proceeds of this offering are also being used in connection with the acquisition of CFG Community Bank and to support continued growth of the Company and its Subsidiaries.

 

During the first quarter of 2013, the Company completed a private offering to accredited investors which resulted in the issuance of 2,265,054 shares totaling $27.1 million in additional capital.  The proceeds of this offering were used to support the acquisition of Potomac Mortgage Group, Inc. (which now does business as MVB Mortgage) as well as the continued growth of the Company.

 

On September 8, 2011 MVB received $8.5 million in Small Business Lending Fund (SBLF) capital.  MVB issued 8,500 shares of $1,000 per share preferred stock with dividends payable in arrears on January 1, April 1, July 1 and October 1 each year.  At December 31, 2013 and 2012, MVB’s loan production qualified for the lowest dividend rate possible of 1%.  MVB may continue to utilize the SBLF capital through March 8, 2016 at the 1% dividend rate. After that time, if the SBLF is not retired, the dividend rate increases to 9%.

 

Note 8 — Net Income Per Common Share

 

The Company determines basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income by the weighted average number of shares outstanding increased by the number of shares that would be issued assuming the exercise of stock options. At March 31, 2014 and 2013, stock options to purchase 468,070 and 391,280 shares at an average price of $8.84 and $8.00, respectively, were outstanding.  For the three months ended March 31, 2014 and 2013, the dilutive effect of stock options was 221,482 and 135,590 shares, respectively.

 

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Table of Contents

 

Note 9 — Segment Reporting

 

During the fourth quarter of 2013, the Company identified three reportable segments: commercial and retail banking; mortgage banking; and insurance services. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts.

 

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by MVB Mortgage.

 

Information about the reportable segments and reconciliation to the consolidated financial statements for the three-month period ended March 31, 2014 are as follows:

 

(in thousands)

 

Commercial
&
Retail Banking

 

Mortgage
Banking

 

Insurance

 

Intercompany
Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

7,580

 

$

637

 

$

 

$

33

 

$

8,250

 

Gain on loans held for sale

 

327

 

3,490

 

 

(33

)

3,784

 

Insurance income

 

 

 

958

 

 

958

 

Other income

 

2,326

 

378

 

 

(1,439

)

1,265

 

Total operating income

 

10,233

 

4,505

 

958

 

(1,439

)

14,257

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

1,339

 

344

 

 

(177

)

1,506

 

Salaries and employee benefits

 

3,030

 

2,977

 

790

 

 

6,797

 

Provision for loan losses

 

519

 

 

 

 

519

 

Other expense

 

3,870

 

1,250

 

181

 

(1,262

)

4,039

 

Total operating expenses

 

8,758

 

4,571

 

971

 

(1,439

)

12,861

 

Income (loss) before income taxes

 

1,475

 

(66

)

(13

)

 

1,396

 

Income tax expense (benefit)

 

268

 

(25

)

(5

)

 

238

 

Net income (loss)

 

1,207

 

(41

)

(8

)

 

1,158

 

Preferred stock dividends

 

21

 

 

 

 

21

 

Net income (loss) available to common shareholders

 

$

1,186

 

$

(41

)

$

(8

)

$

 

$

1,137

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for the three-month period ended March 31, 2014

 

$

1,869

 

$

117

 

$

310

 

$

 

$

2,296

 

Total assets as of March 31, 2014

 

1,050,763

 

86,407

 

4,059

 

(143,804

)

997,425

 

Total assets as of December 31, 2013

 

1,021,097

 

92,290

 

3,012

 

(129,339

)

987,060

 

Goodwill as of March 31, 2014

 

897

 

16,882

 

 

 

17,779

 

Goodwill as of December 31, 2013

 

897

 

16,882

 

 

 

17,779

 

 

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Table of Contents

 

Note 10 — Mergers and Acquisitions

 

The Company and its subsidiary, MVB Bank, have entered into a Purchase and Assumption Agreement with CFG Community Bank (“CFG”) and its parent, Capital Funding Bancorp, Inc., pursuant to which, upon the terms and subject to the conditions set forth therein, the Bank will purchase certain assets and assume certain liabilities of CFG and its subsidiaries for $30 million in consideration, consisting of $26 million in cash and $4 million in shares of MVB Financial common stock, subject to certain adjustments.

 

Consummation of this transaction is subject to certain customary closing conditions, including requisite regulatory approvals and material third-party consents, the absence of certain legal impediments to the consummation of the transaction and subject to certain exceptions, the accuracy of the representations and warranties and compliance with the covenants of each party.

 

The parties have made customary representations, warranties and covenants in the Agreement, including among others, covenants by CFG with respect to the conduct of its business during the interim period between the execution of the agreement and the closing of the transaction.

 

For the three months ended March 31, 2014, the following acquisition related costs are included in the consolidated statements of income as follow (in thousands):

 

Consulting

 

$

51

 

Advertising

 

2

 

Printing, stationery and supplies

 

6

 

Legal and accounting fees

 

18

 

Equipment depreciation and maintenance

 

6

 

Travel

 

32

 

Total

 

$

115

 

 

Note 11 — Stock Split

 

Common shares outstanding at March 31, 2014 and 2013, respectively, have been adjusted for the effect of a two for one stock split effected as a stock dividend paid on February 11, 2014.

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING INFORMATION

 

Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

 

·                  statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of MVB  Financial Corp. (the “Company”) and its subsidiaries (collectively “we,” “our,” or “us), including MVB Bank, Inc. (the “Bank”);

·                  statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” or similar expressions.

 

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the Company’s or the Bank management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in this Management’s Discussion and Analysis section. Factors that might cause such differences include, but are not limited to:

 

·                  the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to successfully execute business plans, manage risks, and achieve objectives;

·                  changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the recent economic crisis, delay of recovery from that crisis, economic conditions and fiscal imbalances in the United States and other countries, potential or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major developments, including wars, military actions, and terrorist attacks;

·                  changes in financial market conditions, either internationally, nationally or locally in areas in which the Company, the Bank,  MVB Mortgage, and MVB Insurance conduct operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;

·                  fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

·                  the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to successfully conduct acquisitions and integrate acquired businesses;

·                  potential difficulties in expanding the businesses of the Company, the Bank, MVB Mortgage, and MVB Insurance in existing and new markets;

·                  increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments;

·                  changes in fiscal, monetary, regulatory, trade and tax policies and laws, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, and the FDIC;

·                  the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact the ability of the Company, the Bank, MVB Mortgage, MVB Insurance, and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;

·                  the impact of the Dodd-Frank Act and of new international standards known as Basel III, and rules and regulations thereunder, many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which the Company, the Bank, MVB Mortgage, and MVB Insurance engage in such activities, the fees that the Bank, MVB Mortgage, and MVB Insurance may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;

·                  continuing consolidation in the financial services industry; new legal claims against the Company, the Bank, MVB Mortgage, and MVB Insurance, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;

·                  success in gaining regulatory approvals, when required;

 

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·                  changes in consumer spending and savings habits;

·                  increased competitive challenges and expanding product and pricing pressures among financial institutions;

·                  inflation and deflation;

·                  technological changes and the implementation of new technologies by the Company, the Bank, MVB Mortgage, and MVB Insurance;

·                  the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to develop and maintain secure and reliable information technology systems;

·                  legislation or regulatory changes which adversely affect the operations or business of the Company, the Bank, MVB Mortgage, or MVB Insurance;

·                  the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; and,

·                  costs of deposit insurance and changes with respect to FDIC insurance coverage levels.

 

Except to the extent required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

 

SUMMARY OF RESULTS OF OPERATIONS

 

At March 31, 2014 and 2013 and for the Three Months Ended March 31, 2014 and 2013:

 

 

 

Three Months Ended
March 31

 

 

 

2014

 

2013

 

Net income to:

 

 

 

 

 

Average assets

 

0.47

%

0.65

%

Average stockholders’ equity

 

4.88

%

6.93

%

Net interest margin

 

3.05

%

2.96

%

 

 

 

 

 

 

Average stockholders’ equity to average assets

 

9.69

%

9.37

%

Total loans to total deposits (end of period)

 

89.52

%

87.76

%

Allowance for loan losses to total loans (end of period)

 

0.81

%

1.02

%

Efficiency ratio

 

84.98

%

79.38

%

Capital ratios:

 

 

 

 

 

Tier 1 capital ratio

 

11.81

%

13.60

%

Risk-based capital ratio

 

12.66

%

14.51

%

Leverage ratio

 

8.55

%

9.52

%

Cash dividends as a percentage of net income

 

N/A

 

N/A

 

Per share data:

 

 

 

 

 

Book value per share (end of period)

 

$

11.43

 

$

10.04

 

Basic earnings per share

 

$

0.15

 

$

0.20

 

Diluted earnings per share

 

$

0.15

 

$

0.19

 

 

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Introduction

 

MVB Financial Corp. (“the Company”) was formed on January 1, 2004, as a bank holding company and, effective December 19, 2012, became a financial holding company.  The Company features multiple subsidiaries and affiliated businesses, including MVB Bank, Inc. (the “Bank” or “MVB Bank”) and its wholly-owned subsidiary MVB Mortgage and MVB Insurance, LLC (“MVB Insurance”). On December 31, 2013, three Company subsidiaries, MVB-Central, Inc. (a second-tier level holding company), MVB-East, Inc. (a second tier holding company) and Bank Compliance Solutions, Inc. (an inactive subsidiary) were merged into the Company.

 

The Bank was formed on October 30, 1997 and chartered under the laws of the State of West Virginia.  The Bank commenced operations on January 4, 1999. In August of 2005, the Bank opened a full service office in neighboring Harrison County, West Virginia.  During October of 2005, the Bank purchased a branch office in Jefferson County, West Virginia, situated in West Virginia’s eastern panhandle.  During the third quarter of 2007, the Bank opened a full service office in the Martinsburg area of Berkeley County, West Virginia.  In the second quarter of 2011, the Bank opened a banking facility in the Cheat Lake area of Monongalia County, West Virginia.  The Bank opened its second Harrison County, West Virginia location, the downtown Clarksburg office in the historic Empire Building during the fourth quarter of 2012.

 

Also during the fourth quarter of 2012, the Bank acquired Potomac Mortgage Group, Inc. (“PMG” which, following July 15, 2013, began doing business under the registered trade name “MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services company, Lender Service Provider, LLC (“LSP”).  In the third quarter of 2013, this fifty percent (50%) interest in LSP was reduced to a twenty-five percent (25%) interest through a sale of a partial interest.  This PMG acquisition provided the Company and the Bank the opportunity to make the mortgage banking operation a much more significant line of business to further diversify its net income stream.   MVB Mortgage has four mortgage only offices, all located in northern Virginia, within the Washington, District of Columbia / Baltimore, Maryland metropolitan area, and, in addition, has mortgage loan originators located at select Bank locations.

 

In the first quarter of 2013, the Bank opened its second Monongalia County location in the Sabraton area of Morgantown, West Virginia.  In the second quarter of 2013, the Bank opened its second full service office in Berkeley County, West Virginia, at Edwin Miller Boulevard. During the first quarter of 2014, the Company continued to focus on growth in the Harrison, Berkeley, Jefferson and Monongalia County areas, as well as the Kanawha county area, as the primary method for reaching performance goals.  The Company continuously reviews key performance indicators to measure our success.

 

Currently, the Bank operates nine full-service banking branches in West Virginia, which are located at:  301 Virginia Avenue in Fairmont, Marion County; 9789 Mall Loop (inside the Shop N Save Supermarket) in White Hall, Marion County; 1000 Johnson Avenue in Bridgeport, Harrison County; 406 West Main St. in Clarksburg, Harrison County; 88 Somerset Boulevard in Charles Town, Jefferson County; 651 Foxcroft Avenue in Martinsburg, Berkeley County; 2400 Cranberry Square in Cheat Lake, Monongalia County; 10  Sterling  Drive in Morgantown, Monongalia County; and 231 Aikens Center in Martinsburg, Berkeley County.  In addition, the Bank operates a loan processing office at 184 Summers Street, Charleston, Kanawha County, West Virginia.   The Bank has received regulatory approval from the Federal Deposit Insurance Corporation (“FDIC”) and the West Virginia Division of Financial Institutions to construct a replacement location on Copley Drive in Fairmont, Marion County, West Virginia, for its current White Hall location.  In addition, the Bank has initiated construction of a new facility in Kanawha County, West Virginia.

 

In addition to MVB Mortgage, the Company has a wholly-owned subsidiary, MVB Insurance, LLC.  MVB Insurance was originally formed in 2000 and reinstated in 2005, as a Bank subsidiary.  Effective June 1, 2013, MVB Insurance became a direct subsidiary of the Company.  MVB Insurance offers select insurance products

 

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such as title insurance, individual insurance, commercial insurance, employee benefits insurance, and professional liability insurance.  MVB Insurance maintains its headquarters at 301 Virginia Avenue, Fairmont, West Virginia,   and operates offices at: 48 Donley Street, Suite 703, Morgantown, West Virginia, 2400 Cranberry Square, Morgantown, West Virginia,; and 355 Wharton Circle, Suite 123, Triadelphia, West Virginia.

 

The Company’s primary business activities, through its Subsidiaries, are currently community banking, mortgage banking, insurance services, and wealth management.  As a community banking entity, the Bank offers its customers a full range of products through various delivery channels.  Such products and services include checking accounts, NOW accounts, money market and savings accounts, time certificates of deposit, commercial, installment, commercial real estate and residential real estate mortgage loans, debit cards, and safe deposit rental facilities.  Services are provided through our walk-in offices, automated teller machines (“ATMs”), drive-in facilities, and internet and telephone banking. Additionally, the Bank offers non-deposit investment products through an association with a broker-dealer, and also offers correspondent lending services to assist other community banks in offering longer term fixed rate loan products that may be sold into the secondary market.  Since the opening date of January 4, 1999, the Bank, has experienced significant growth in assets, loans, and deposits due to overwhelming community and customer support in the Marion County, West Virginia and Harrison County, West Virginia markets, expansion into West Virginia’s eastern panhandle counties and, most recently, into Monongalia County, West Virginia.  With the acquisition of PMG, mortgage banking is now a much more significant focus, which has opened up increased market opportunities in the Washington, District of Columbia / Baltimore, Maryland metropolitan region and added enough volume to better diversify the Company’s earnings stream.

 

The Company and the Bank entered into a purchase and assumption agreement, on October 23, 2013, to purchase certain assets and assume specific liabilities, subject to regulatory approvals, of CFG Community Bank (“CFG Bank”), a subsidiary of Capital Funding Bancorp, Inc., headquartered in Lutherville, Maryland.   This pending transaction, which is, again, subject to regulatory approvals, would increase the presence of the Company and the Bank in the Washington, District of Columbia / Baltimore, Maryland metropolitan region through the addition of three new branches in: Annapolis, Maryland; Baltimore, Maryland; and Lutherville, Maryland.  Further, the transaction would include an additional office, also in Lutherville, Maryland.

 

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. At March 31, 2014, the Company had 300 full-time equivalent employees. The Company’s principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800.  The Company’s Internet web site is www.mvbbanking.com.

 

Application of Critical Accounting Policies

 

The Company’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

 

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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 the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s 2013 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.

 

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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 losses inherent in classifications of homogeneous loans based on historical loss experience of peer banks, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.  Non-homogeneous loans are specifically evaluated due to the increased risks inherent in those loans.  The loan portfolio also represents the largest asset type 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.

 

All dollars are expressed in thousands, unless as otherwise noted or specified.

 

Results of Operations

 

Overview of the Statement of Income

 

For the quarter ended March 31, 2014, the Company earned $1,158 compared to $1,188 in the first quarter of 2013.  Net interest income increased by $1,880, noninterest income decreased by $977 and noninterest expenses increased by $1.4 million.  The increase in net interest income was driven mainly by the continued growth of the Company balance sheet, with $178.7 million in average loan growth and despite an increase in average interest bearing liabilities of $216.3 million and an increase in interest expense of $194.  There was also a decrease in cost of funds of 13 basis points.  The decrease in noninterest income was mainly the result of a decrease in gain on loans held for sale of $1.1 million as a result of a decrease in loan production. The increase in noninterest expenses was principally the result of increased salaries expense of $577, with the addition of the Sabraton and Edwin Miller Bank offices as well as additions in the areas of information technology staff, legal staff, operations center staff, human resources and accounting additions and additional staff related to MVB Insurance, LLC, as well as increases for existing staff.  Occupancy costs increased $187, the result of the additions of the Sabraton and Edwin Miller Bank offices and additional leased office space in both the Cheat Lake Bank office, the Bank Operations Center, MVB Insurance, LLC and MVB Financial Corp. Data processing costs increased $175 due to the increased usage of products available to save time and better automate processes. Consulting fees increased $91 as a result of increased costs related to a current acquisition as discussed in Note 11. Travel costs increased $69 as a result of both the additional staff related to MVB Insurance, LLC, as well as the current acquisition as discussed in Note 11.   Other operating expenses increased by $113, mainly the result of the following: increased postage and freight expense of $17, telephone expense of $46, and insurance expense of $43.

 

Loan loss provisions of $519 and $1.0 million were made for the quarters ended March 31, 2014 and 2013, 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.  The Company charged off $9 in loans during the first quarter of 2014 versus $502 for the same time period in 2013. The reduced provision is the result of lesser charge-offs in the first quarter of 2014 versus the same time period in 2013.  Due to the Bank’s purchase of commercial loans in late 2013 that were marked to fair value at the time they were recorded on the balance sheet, the allowance for loan losses to total loans decreased from 1.02% at March 31, 2013 to 0.81% at March 31, 2014.

 

Noninterest income for the quarters ended March 31, 2014 and 2013 totaled $6.0 million and $7.0 million, respectively.  The most significant portions of noninterest income are gain on loans held for sale, which totaled $3.8 million for the quarter ended March 31, 2014, a decrease of $1.1 million from the first quarter of 2013, the result of decreased mortgage loan volume; insurance income which totaled $958 for the quarter ended March 31, 2014, a new income stream that began during the third quarter of 2013; capitalized servicing retained income which totaled $156 for the quarter ended March 31, 2014, a decrease of $182 over the first quarter of 2013, also the result of decreased mortgage loan volume; gain on derivative which totaled $335 for the quarter ended March 31, 2014, a decrease of $542 over the first quarter of 2013, also the result of decreased mortgage loan volume; and other operating income which totaled $374 for the quarter ended March 31, 2014, a decrease

 

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of $114 from the prior year, mainly the result of the following: inspection fees of $30 and title insurance premiums of $89.

 

Noninterest expense for the quarters ended March 31, 2014 and 2013 totaled $10.8 million and $9.4 million, respectively.  The most significant increases were as discussed above.

 

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 a 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 March 31, 2014 and 2013 was 3.05% and 2.96% respectively.  The 9 basis point increase in the Bank’s net interest margin for the quarter ended March 31, 2014 was the result of a 13 basis point reduction in the cost of funds. The continued low rate environment and increasing competition for quality credit continues to apply pressure upon the Bank’s loan portfolio yield. The funding side of the bank also helped in increasing asset yield as a result of a 4 basis point reduction in the cost of funds.  The Bank was able to grow average loan balances by $178.7 million, which enabled an increase in net interest income of $1.9 million.

 

Company and Bank management continuously monitor the effects of net interest margin on the performance of the Bank and, thus, the Company. Growth and mix of the balance sheet will continue to impact net interest margin in future periods.

 

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Table of Contents

 

Average Balances and Analysis of Net Interest Income (Unaudited)

 

The following tables provide further information about interest income and expense:

 

 

 

Three Months Ended
March 31, 2014

 

Three Months Ended
March 31, 2013

 

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(Dollars in thousands) 

 

Balance

 

Expense

 

Cost

 

Balance

 

Expense

 

Cost

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in banks

 

$

11,402

 

$

5

 

0.17

%

$

12,127

 

$

4

 

0.14

%

CD’s with other banks

 

9,427

 

41

 

1.75

 

9,427

 

41

 

1.75

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

105,933

 

411

 

1.55

 

78,900

 

246

 

1.25

 

Tax-exempt

 

56,748

 

413

 

2.90

 

35,351

 

279

 

3.15

 

Loans and loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

432,965

 

4,836

 

4.47

 

285,383

 

3,394

 

4.76

 

Tax exempt

 

37,207

 

341

 

3.67

 

22,723

 

236

 

4.15

 

Real estate

 

216,480

 

2,008

 

3.71

 

200,466

 

1,769

 

3.53

 

Consumer

 

18,599

 

195

 

4.19

 

17,021

 

207

 

4.87

 

Allowance for loan losses

 

(5,328

)

 

 

(4,335

)

 

 

Net loans

 

699,923

 

7,380

 

4.22

 

521,258

 

5,606

 

4.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earning assets

 

883,433

 

8,250

 

3.74

 

657,063

 

6,176

 

3.76

 

Cash and due from banks

 

24,809

 

 

 

 

 

21,453

 

 

 

 

 

Other assets

 

71,170

 

 

 

 

 

53,134

 

 

 

 

 

Total assets

 

$

979,412

 

 

 

 

 

$

731,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

339,098

 

546

 

0.64

 

245,171

 

504

 

0.82

 

Money market checking

 

31,794

 

31

 

0.39

 

22,980

 

18

 

0.31

 

Savings

 

38,663

 

37

 

0.38

 

27,758

 

41

 

0.59

 

IRAs

 

9,605

 

30

 

1.26

 

9,597

 

42

 

1.76

 

CDs

 

232,902

 

454

 

0.78

 

148,603

 

302

 

0.81

 

Repurchase agreements and federal funds sold

 

75,296

 

126

 

0.67

 

69,469

 

127

 

0.73

 

FHLB and other borrowings

 

86,507

 

263

 

1.21

 

73,994

 

258

 

1.39

 

Subordinated debt

 

4,124

 

19

 

1.86

 

4,124

 

20

 

1.90

 

Total interest-bearing liabilities

 

817,989

 

1,506

 

0.74

 

601,696

 

1,312

 

0.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

 

59,717

 

 

 

 

 

54,981

 

 

 

 

 

Other liabilities

 

6,784

 

 

 

 

 

6,418

 

 

 

 

 

Total liabilities

 

884,490

 

 

 

 

 

663,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

8,500

 

 

 

 

 

8,500

 

 

 

 

 

Common stock

 

7,708

 

 

 

 

 

2,970

 

 

 

 

 

Paid-in capital

 

69,614

 

 

 

 

 

49,416

 

 

 

 

 

Treasury stock

 

(2,167

)

 

 

 

 

(1,084

)

 

 

 

 

Retained earnings

 

14,220

 

 

 

 

 

10,287

 

 

 

 

 

Accumulated other comprehensive income

 

(2,953

)

 

 

 

 

(1,534

)

 

 

 

 

Total stockholders’ equity

 

94,922

 

 

 

 

 

68,555

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

979,412

 

 

 

 

 

$

731,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

3.00

 

 

 

 

 

2.89

 

Net interest income-margin

 

 

 

$

6,744

 

3.05

%

 

 

$

4,864

 

2.96

%

 

34



Table of Contents

 

Non-Interest Income

 

Gain on loans held for sale generates the core of the Bank’s noninterest income. Noninterest income totaled $6.0 million in the first quarter of 2014 compared to $7.0 million in the first quarter of 2013.  The decrease of $1.0 million was mainly the result of a decrease in gain on loans held for sale of $1.1 million as a result of a decrease in loan production.

 

Service charges on deposit accounts continue to be part of the core of the Bank’s other income, and thus, the Company’s other income and include mainly non-sufficient funds and returned check fees, allowable overdraft fees and service charges on commercial accounts. For the quarters ended March 31, 2014 and 2013, service charges totaled $120 and $137, respectively.

 

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 the Bank and the Company, as well as servicing retained on mortgage loans sold into the secondary market.

 

Non-Interest Expense

 

For the first quarter of 2014, noninterest expense totaled $10.8 million compared to $9.4 million in the first quarter of 2013. The Company’s efficiency ratio was 84.98% for the first quarter of 2014 compared to 79.38% for the first quarter of 2013.  This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus non-interest income.  The increased efficiency ratio is the result of noninterest expense outpacing the growth in net interest income and other income.

 

Salaries and benefits totaled $6.8 million for the quarter ended March 31, 2014 compared to $6.2 million for the quarter ended March 31, 2013. This $577 increase in salaries and benefits is mainly the result of the addition of the Sabraton and Edwin Miller Bank offices as well as additions in the areas of information technology staff, legal staff, operations center staff, human resources and accounting additions and additional staff related to MVB Insurance, LLC, as well as increases for existing staff.  The Company had 300 full-time equivalent personnel at March 31, 2014, as noted, compared to 252 full-time equivalent personnel as of March 31, 2013.  Company and Bank 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 March 31, 2014 and 2013, occupancy expense totaled $617 and $430, respectively.  This $187 increase is the result of the additions of the Sabraton and Edwin Miller Bank offices and additional leased office space in both the Cheat Lake Bank office, the Bank Operations Center, MVB Insurance, LLC and MVB Financial Corp. Data processing costs increased $175 compared to the first quarter of 2013 due to the increased usage of products available to save time and better automate processes.

 

Other operating expense totaled $856 in the first quarter of 2014 compared to $743 in the first quarter of 2013. The largest items relating to this increase were in the areas of postage and freight expense, telephone expense and insurance expense.

 

Return on Average Assets and Average Equity

 

Returns on average assets (ROA) and average equity (ROE) were .47% and 4.88% for the first quarter of 2014 compared to .65% and 6.93% in the first quarter of 2013.

 

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Table of Contents

 

Overview of the Statement of Condition

 

The Company’s interest-earning assets, interest-bearing liabilities, and stockholders’ equity changed significantly during the first quarter of 2014 compared to 2013. The most significant areas of change between the quarters ended March 31, 2014 and March 31, 2013 were as follows: loans and loans held for sale increased to an average balance of $699.9 million from $521.3 million, interest-bearing liabilities grew to an average balance of $818.0 million from $601.7 million and stockholders’ equity grew by $26.4 million to an average of $94.9 million.  These trends reflect the continued growth of the Company and its subsidiaries in the loan, deposit and capital areas.

 

Total assets at March 31, 2014 were $997.4 million or an increase of $10.4 million since December 31, 2013.  The greatest area of increase was $53.3 million in loan growth.

 

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Table of Contents

 

Deposits totaled $754.6 million at March 31, 2014 or an increase of $58.8 million since December 31, 2013, mainly the result of an increase in broker buster deposits and other interest bearing deposits.

 

Stockholders’ equity has increased approximately $5.3 million from December 31, 2013 due to earnings for the three months ended March 31, 2014 of $1.2 million and through the issuance of 240,954 shares of common stock totaling $3.7 million in additional capital.

 

Cash and Cash Equivalents

 

Cash and cash equivalents totaled $32.6 million as of March 31, 2014 compared to $39.8 million as of December 31, 2013.

 

Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity and performance demands.  Management believes the liquidity needs of the Company are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year.  These sources of funds should enable the Company and the Bank to meet cash obligations as they come due.

 

Investment Securities

 

Investment securities totaled $161.4 million as of March 31, 2014 and $163.1 million as of December 31, 2013. The investment portfolio is fairly evenly balanced between government sponsored agency securities, mortgage-backed securities and municipal securities.

 

The Company and Bank management monitor the earnings performance and liquidity of the investment portfolio on a regular basis through Asset/Liability Committee meetings. The group also monitors net interest income, sets pricing guidelines, and manages interest rate risk for the bank. Through active balance sheet management and analysis of the investment securities portfolio, the bank maintains sufficient liquidity to satisfy depositor requirements and the various credit needs of its customers. The Company and Bank management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

 

Loans

 

The Bank’s lending is primarily focused in the Marion, Harrison, Jefferson, Berkeley and Monongalia County areas of West Virginia with a secondary focus on the adjacent counties in West Virginia. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. Northern Virginia is also a key area of focus for the Bank in the secondary market lending arena.

 

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Loan Concentration

 

At March 31, 2014, commercial loans comprised the largest component of the loan portfolio.  The majority of commercial loans that are not secured by real estate are lines of credit secured by accounts receivable and equipment and obligations of states and political subdivisions. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries but primarily located in our market areas.

 

Allowance for Loan Losses

 

The Bank management continually monitors the loan portfolio through review of the monthly delinquency reports and through the Bank Loan Review Committee.  The Bank Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses.  Their analysis involves both experience of the portfolio to date and the makeup of the overall portfolio.  Specific loss estimates are derived for individual loans based on specific criteria such as current delinquency status, related deposit account activity, where applicable, local market rumors, which are generally based on some factual information, and changes in the local and national economy.  While local market rumors are not measurable or perhaps not readily supportable, historically, this form of information can be an indication of a potential problem.  The allowance for loan losses is further based upon the internal risk rating assigned to the various loan types within the portfolio.

 

Capital Resources

 

The Company considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for the bank, reaching $754.6 million at March 31, 2014.

 

Non-interest bearing deposits remain a core funding source for the Bank and, thus, the Company.  At March 31, 2014, non-interest bearing deposits totaled $56.8 million compared to $63.3 million at December 31, 2013.  The Company and Bank management intend to continue to focus on finding ways to increase the base of non-interest bearing funding sources of the Bank and other Company subsidiaries.

 

Interest-bearing deposits totaled $697.8 million at March 31, 2014 compared to $632.5 million at December 31, 2013. Average interest-bearing liabilities totaled $818.0 million during the first quarter of 2014 compared to $601.7 million for the first quarter of 2013.  Average non-interest bearing demand deposits totaled $59.7 million for the first quarter of 2014 compared to $55.0 million for the first quarter of 2013.  Management will continue to emphasize deposit gathering in 2013 by offering outstanding customer service and competitively priced products.  The Company and Bank management will also concentrate on balancing deposit growth with adequate net interest margin to meet the Company’s strategic goals.

 

Along with traditional deposits, the Bank has access to both repurchase agreements, which are corporate deposits secured by pledging securities from the investment portfolio, and Federal Home Loan Bank borrowings to fund its operations and investments.  At March 31, 2014, repurchase agreements totaled $71.5 million compared to $81.6 million at December 31, 2013.  In addition to the aforementioned funds alternatives, the Bank has access to more than $302.5 million through additional advances from the Federal Home Loan Bank of Pittsburgh and the ability to readily sell jumbo certificates of deposits to other banks as well as brokered deposit markets.

 

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Liquidity

 

The Company recognizes the importance of liquidity in the day-to-day operations of the Bank, and believes it is critical to have a plan for addressing liquidity in times of crisis, as well as prudently managing levels to maximize earnings.  The Bank has historically recognized the need for funding sources that go beyond the most important source which is retail deposit business.  The Company and the Bank  have created a funding program that identifies various wholesale funding sources that may be used whenever appropriate.  These sources include the following: FHLB advances, brokered deposits, CDARS, repurchase agreements, internet CDs through Qwickrate, the Federal Reserve discount window, State of West Virginia CD auctions, and federal funds purchased through the Federal Reserve.  Limits have been set as to how much MVB will utilize each identified source.  The Bank currently is taking advantage of all of the above, with the exception of federal funds purchased and the discount window.  This allows the Bank to lower funding costs slightly while documenting the availability of each.

 

Current Economic Conditions

 

The current economic climate in West Virginia, and, in particular, in the six counties in which the Company and the Bank focuses possess better economic climates than the general national climate.  Unemployment in the United States was 7.0% and 8.1% in February 2014 and 2013, respectively.  The unemployment levels in the six West Virginia counties where MVB operates in were as follows: Berkeley County’s unemployment rate was 6.4% and 7.0% in February 2014 and 2013, respectively.  Harrison County’ unemployment rate was 6.3% and 6.6% in February 2014 and 2013, respectively.  Jefferson County’s unemployment rate was 5.3% and 5.1% in February 2014 and 2013, respectively. Marion County’s unemployment rate was 6.5% and 6.7% in February 2014 and 2013, respectively. Monongalia County’s unemployment rate was 4.6% and 4.9% in February 2014 and 2013, respectively. Kanawha County’s unemployment rate was 6.4% and 6.8% in February 2014 and 2013, respectively. The numbers from all six counties continue to be significantly better than the national numbers.

 

The Company and the Bank nonperforming loan information supports the fact that the West Virginia economy has not suffered as much as that of the nation as a whole.  Nonperforming loans to total loans were 0.64% in March of 2014 versus 0.66% in March of 2013 and charge offs to total loans were 0.00% and 0.11 % for each period respectively. The Company and the Bank continue to closely monitor economic and delinquency trends.

 

Capital/Stockholders’ Equity

 

The Company and the Bank have financed operations and growth over the years through the sale of equity.  These equity sales have resulted in an effective source of capital.

 

During the first quarter of 2013 the Company completed a private offering to accredited investors under Regulation D of the Securities Act which resulted in the issuance of 2,265,054 shares totaling $27.1 million in additional capital.  The proceeds of this offering were used to support the acquisition of PMG as well as the continued growth of the Company.

 

During 2013, the Company commenced a private offering to accredited investors under Rule 506 of Regulation D.  As of December 31, 2013 the Company had received subscriptions for 610,194 shares totaling $9.8 million in additional capital at December 31, 2013.  During the first quarter of 2014 the Company received additional subscriptions for 236,524 shares totaling $3.8 million in additional capital at March 31, 2014.  The proceeds of this offering are being used in connection with the acquisition of CFG Community Bank as well as continued growth of the Company.

 

At March 31, 2014, accumulated other comprehensive loss totaled $(2,639) compared to $(2,961) at December 31, 2013. This change is primarily the result in the rise of the market values of investment securities.

 

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Treasury stock shares totaled 102,154 shares.

 

The primary source of funds for dividends to be paid by the Company are dividends received by the Company from the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any year exceed that year’s retained net profits, as defined, plus the retained net profits, as defined, of the two preceding years.

 

Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy.  Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios.  A weight category of 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets) is assigned to each asset on the balance sheet.  Detailed information concerning MVB’s risk-based capital ratios can be found in Note 14 of the Notes to the Consolidated Financial Statements of the Company’s 2013 Form 10-K. At March 31, 2014, the Company’s and the Bank’s risk-based capital ratios exceeded the minimum standards for a well capitalized financial institution.

 

Commitments

 

In the normal course of business, the Bank is party to financial instruments with off-balance sheet risk necessary to meet the financing needs of customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments express the extent of involvement the bank has in these financial instruments.

 

Loan commitments are made to accommodate the financial needs of the Bank’s customers.  The Bank uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. The total amount of loan commitments outstanding at March 31, 2014 and December 31, 2013 was $134.9 million and $92.3 million, respectively.

 

Market Risk

 

There have been no material changes in market risks faced by the Company since December 31, 2013.  For information regarding the Company’s market risk, refer to the Company’s Annual Report to Shareholders for the year ended December 31, 2013.

 

Effects of Inflation on Financial Statements

 

Substantially all of the Bank’s assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the banking industry, typically monetary assets exceed monetary liabilities. Therefore as prices increase, financial institutions experience a decline in the purchasing power of their net assets.

 

Future Outlook

 

The Company’s and the Bank’s results of operations in the first quarter of 2014 are in line with the first quarter of 2013 mainly due to the improvement in net interest income and the addition of insurance income. The Company’s emphasis in future periods will be to do those things that have made the bank successful thus far. The critical challenge for the bank in the future is to attract core deposits to fund growth in the new markets through continued delivery of the most outstanding customer service with the highest quality products and technology.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

No response required.

 

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Item 4. Controls and Procedures

 

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, along with the Company’s Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of March 31, 2014, of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, the Company’s Chief Executive Officer, along with the Company’s Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2014.

 

There have been no material changes in the Company’s internal control over financial reporting during the first quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

 

From time to time in the ordinary course of business, the Company and its subsidiaries are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations.  Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations.  Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings, the results are difficult to predict at all.  The Company is not aware of any asserted or unasserted legal proceedings or claims that the Company believes would have a material adverse effect on the Company’s financial condition or results of the Company’s operations.

 

Item 1A. Risk Factors

 

No response required.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the first quarter of 2014, the Company began a private offering under Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) of subordinated promissory notes and preferred stock.  During the first quarter of 2014, the Company received subscriptions for subordinated promissory notes totaling $12.4 million.  In addition, during the same period, the Company received subscriptions for five-hundred preferred stock shares totaling $500 in additional capital.  As of March 31, 2014, the Company had not issued any notes on shares of preferred stock, and subscribers’ funds have been placed in an escrow account.  A single scheduled closing will occur in the second quarter of 2014 whereby the escrowed funds will be released.  The proceeds of these subordinated debt and preferred stock offerings will be used in connection with the acquisition of CFG Community Bank and continued growth of the Company and its Subsidiaries.

 

During 2013, the Company commenced a private offering under Rule 506 of Regulation D of its common stock to accredited investors.  As of December 31, 2013, the Company had received subscriptions for 610,194 common stock shares totaling $9.8 million in additional capital.  During the first quarter of 2014, the Company received additional subscriptions for 236,524 common stock shares totaling $3.8 million in additional capital at March 31, 2014.  The proceeds of this offering are also being used in connection with the acquisition of CFG Community Bank and to support continued growth of the Company and its Subsidiaries.

 

During the first quarter of 2013, the Company completed a private offering to accredited investors which resulted in the issuance of 2,265,054 shares totaling $27.1 million in additional capital.  The proceeds of this offering were used to support the acquisition of Potomac Mortgage Group, Inc. (which now does business as MVB Mortgage) as well as the continued growth of the Company.

 

On September 8, 2011 MVB received $8.5 million in Small Business Lending Fund (SBLF) capital.  MVB issued 8,500 shares of $1,000 per share preferred stock with dividends payable in arrears on January 1, April 1, July 1 and October 1 each year.  At December 31, 2013 and 2012, MVB’s loan production qualified for the lowest dividend rate possible of 1%.  MVB may continue to utilize the SBLF capital through March 8, 2016 at the 1% dividend rate. After that time, if the SBLF is not retired, the dividend rate increases to 9%.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The following exhibits are filed herewith.

 

Exhibit   3.1*        Articles of Incorporation, as amended

 

Exhibit 31.1          Certificate of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2          Certificate of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1          Certificate of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2          Certificate of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS*               XBRL Instance Document

 

101.SCH*             XBRL Taxonomy Extension Schema

 

101.CAL*             XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF*              XBRL Taxonomy Extension Definition Linkbase

 

101.LAB*             XBRL Taxonomy Extension Label Linkbase

 

101.PRE*              XBRL Taxonomy Extension Presentation Linkbase

 


* Filed or furnished with the original filing of the Quarterly Report on Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 16, 2014

 

 

 

MVB Financial Corp.

 

 

 

 

 

 

 

By:

/s/ Larry F. Mazza

 

 

Larry F. Mazza

 

 

Chief Executive Officer & President

 

 

 

 

 

 

 

By:

/s/ Bret S. Price

 

 

Bret S. Price

 

 

Senior Vice President & Chief Financial Officer

 

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