MVB Financial Corp. — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparisons are primarily with FY 2019. Although the request identifies Q4, this 10-K reports full-year results. Dollar amounts below are in millions unless noted.
Business context
MVB is a West Virginia financial holding company operating mainly through MVB Bank. Its businesses include commercial and retail banking, nationwide Fintech banking, compliance and fraud-prevention services, and mortgage banking. In July 2020, its mortgage operations combined with Intercoastal Mortgage Company (ICM); MVB retained a 47% common interest and preferred units, accounted for as an equity-method investment. The bank operated 13 full-service branches at year-end.
Financial performance and condition
| Metric | FY 2020 / Dec. 31, 2020 | FY 2019 / Dec. 31, 2019 |
|---|---|---|
| Total interest and noninterest income | $172.3 | $147.0 |
| Net interest income | $68.8 | $59.4 |
| Net interest margin, GAAP | 3.51% | 3.47% |
| Net interest margin, tax-equivalent | 3.57% | 3.53% |
| Provision for loan losses | $16.6 | $1.8 |
| Noninterest income | $91.8 | $64.6 |
| Noninterest expense | $97.1 | $87.2 |
| Net income | $37.4 | $27.0 |
| Diluted earnings per share | $3.06 | $2.20 |
| Return on average assets / equity | 1.7% / 16.7% | 1.4% / 13.6% |
| Total assets | $2,331.5 | $1,944.1 |
| Total loans, gross | $1,454.8 | $1,374.2 |
| Total deposits | $1,982.4 | $1,265.0 |
| Cash and cash equivalents | $263.9 | $28.0 |
| Stockholders’ equity | $239.5 | $211.9 |
- Earnings and revenue: Net income increased $10.4 million. Net interest income rose 15.9%, as lower funding costs more than offset lower earning-asset yields. Tax-equivalent earning-asset yield declined to 4.17% from 4.87%; interest-bearing liability cost fell to 0.85% from 1.68%.
- Cash flow: Net cash from operating activities was $112.2 million, investing activities used $294.1 million, and financing activities provided $417.8 million. Cash increased $235.9 million during the year.
- Credit quality: The allowance for loan losses was $25.8 million, or 1.8% of gross loans, versus $11.8 million, or 0.9%, a year earlier. Nonperforming loans were $13.7 million (0.9% of gross loans), compared with $5.1 million (0.4%). Net charge-offs were $2.1 million.
- Funding and debt: Noninterest-bearing deposits were $715.8 million, 36.1% of deposits, versus $278.5 million, 22.0%, in 2019. No FHLB borrowings remained at year-end; available FHLB borrowing capacity was reported at $440.9 million. Subordinated debt was $43.4 million, including $40 million of notes issued in November 2020.
- Capital and shareholder returns: Bank capital ratios were above “well-capitalized” thresholds: total risk-based capital 15.8%, CET1 14.6%, and leverage 11.0%. Common dividends were $0.36 per share for 2020. The company repurchased approximately $15.7 million of common stock during the year.
Material changes and unusual items
- Noninterest income rose by $27.2 million. Major items included $24.2 million of ICM equity-method investment income, $17.6 million of acquisition/divestiture gains, and $3.5 million of gains on equity-security sales. These were partly offset by a $13.4 million decrease in unrealized equity-security holding gains and a $7.6 million decrease in mortgage fee income following the ICM combination.
- The $17.6 million of acquisition/divestiture gains included a $9.6 million gain on the sale of four branches to Summit and a $4.7 million bargain-purchase gain from the FDIC-assisted First State acquisition. The First State acquisition brought deposits, loans, three branches and acquired credit-impaired loans.
- The loan-loss provision increased to $16.6 million, largely reflecting COVID-related qualitative reserve enhancements and risk-grade downgrades. Management attributed $12.8 million of additional provision to enhanced qualitative factors and approximately $3.8 million to risk-grade changes on significant loans.
- Commercial and nonresidential real estate loans represented about 80% of gross loans. The filing lists $59.1 million of potential problem loans and a further $42.0 million of problem loans; management said these were being monitored and were not considered impaired at year-end. Special Mention and Substandard balances increased materially from 2019.
- The bank originated 455 PPP loans totaling $92.8 million; $82.0 million remained outstanding at year-end. Loan modifications approved included $34.7 million of commercial loans and $13.5 million of mortgage loans.
- Gaming deposits were approximately 18% of total deposits. Management identified Fintech deposit concentration and the loss of large relationships as risks.
Outlook, risks and contingencies
Management gave no quantified earnings or revenue guidance. It expects near-term loan activity to remain strong and intends to focus on margin improvement, organic loan growth, capital leverage, operating efficiency, and expanding Fintech treasury, deposit-acquisition and fee-income strategies. Management also expects net interest income to decline in the low-rate environment, given the bank’s asset-sensitive position, while anticipating that the Treasury yield curve could rise as the pandemic outlook improves.
Key uncertainties include the pandemic’s effects on borrowers and local economies, elevated credit risk in commercial real estate and other affected industries, interest-rate and margin pressure, reliance on concentrated Fintech and gaming deposits, mortgage-market performance at ICM, and regulatory, cyber, operational and compliance risks. The filing also discusses PPP-related litigation and SBA-guarantee risks, LIBOR transition uncertainty, and potential liquidity or funding pressures. Contractual commitments to extend credit and letters of credit totaled $436.0 million; many may expire undrawn. Management reported no material pending legal proceedings and stated that ordinary-course legal matters were not expected to have a significant adverse effect.
The financial-statement auditor issued an unqualified opinion and also an unqualified opinion on internal control over financial reporting. The auditor identified the allowance for loan losses and fair value of acquired First State loans as critical audit matters. The First State acquisition was excluded from management’s internal-control assessment and the auditor’s internal-control audit under the SEC’s acquired-business guidance.
Important facts for investors to verify
- How much of 2020 earnings depended on the $17.6 million in transaction gains and ICM-related income, and how sustainable ICM’s earnings are.
- Whether the increased allowance adequately reflects pandemic-related risk, particularly given rising criticized, impaired and nonperforming loan balances.
- The composition, stability and cost of Fintech deposits, including gaming deposits, and the effects of losing a major depositor relationship.
- ICM’s mortgage production, secondary-market access, pipeline and contribution to MVB earnings after the 2020 combination.
- The bank’s actual exposure to adverse interest-rate scenarios and the reported breaches of net-interest-income-at-risk policy limits under severe falling-rate shocks.
- The use and eventual forgiveness or repayment of PPP loans, and whether any SBA guarantee or compliance issues emerge.
- The terms and capital treatment of the $40 million subordinated-note issuance, future funding needs, and the effect of repurchases and dividends on capital.
- The impact of the January 2021 redemption of the company’s outstanding Series B and Series C preferred stock.