MVB Financial Corp. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. MVB is a West Virginia-based financial holding company operating primarily through MVB Bank, with community and commercial banking, mortgage banking, and a financial holding company segment. Its markets are concentrated in West Virginia and northern Virginia.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $1.751 billion | $1.534 billion |
| Loans, net at year-end | $1.293 billion | $1.096 billion |
| Deposits at year-end | $1.309 billion | $1.160 billion |
| Net interest income | $52.1 million | $44.3 million |
| Net income from continuing operations | $12.0 million | $7.6 million |
| Diluted EPS from continuing operations | $1.00 | $0.68 |
| Net interest margin | 3.41% | 3.27% |
| Noninterest income | $38.6 million | $40.7 million |
| Noninterest expense | $72.9 million | $70.5 million |
Net interest income rose 17.5%, supported by growth in average earning assets and higher asset yields; the yield on earning assets increased to 4.58% from 4.17%. Higher deposit and borrowing costs partly offset that benefit. The efficiency ratio improved to 80.36% from 82.94%. Return on average assets was 0.73% and return on average equity was 7.46%.
Mortgage fee income fell $4.8 million as mortgage production volume declined 6.1% to $1.44 billion. Provision for loan losses was $2.4 million, versus $2.2 million; net charge-offs were $1.4 million in both years. Cash and cash equivalents were $22.2 million at year-end. Operating cash flow was $6.7 million, investing cash outflow $210.0 million, and financing cash inflow $205.2 million.
Year-end funding included $1.309 billion in deposits, $214.9 million in FHLB and other borrowings, $14.9 million in repurchase agreements, and $17.5 million in subordinated debt. Equity was $176.8 million, or 10.10% of assets. The Bank was reported well capitalized; its total risk-based capital ratio was 13.3%, CET1 ratio 12.5%, and leverage ratio 10.2%. The filing reports approximately $97.9 million of remaining FHLB borrowing capacity at year-end.
Material changes and notable items
- Total loans grew $198.4 million (17.9%), led by commercial and nonresidential real estate lending; deposits increased $149.6 million. Noninterest-bearing deposits rose to $213.6 million from $126.0 million.
- Noninterest income declined $2.1 million, mainly due to lower mortgage fees. Noninterest expense increased $2.4 million, including higher staffing costs; data-processing expense fell $1.4 million following efficiencies from the 2017 core conversion.
- $16.0 million of subordinated debt converted into 1.0 million common shares, reducing year-end subordinated debt and expected annual interest expense by about $1.1 million.
- Available-for-sale securities had $4.9 million of gross unrealized losses at year-end; accumulated other comprehensive loss widened to $6.8 million, primarily reflecting lower securities market values. Management stated it intended and was able to hold the securities and did not consider them other-than-temporarily impaired.
- The effective tax rate fell to 22% from 39%, primarily reflecting the 21% federal corporate tax rate enacted in 2017 and the absence of the prior-year $646,000 deferred-tax remeasurement charge.
- Fourth-quarter net income was $3.0 million versus $1.4 million in fourth-quarter 2017. Q4 net interest income increased to $14.4 million, while noninterest income declined to $8.3 million.
Outlook, risks and contingencies
Management emphasized margin improvement, capital deployment, organic loan growth, and operating efficiency. It expects loan activity to remain strong in the near term and identified attracting core deposits to fund expansion as a key challenge. The company is expanding treasury services for financial and emerging technology companies. No quantified earnings or revenue guidance was provided.
- Credit exposure is concentrated geographically in West Virginia and Virginia, with commercial and nonresidential real estate loans representing about 72% of the loan portfolio. Nonperforming loans were $7.1 million (0.54% of gross loans), down from $9.7 million (0.88%); past-due loans over 30 days increased to $16.2 million from $9.8 million.
- Troubled debt restructurings totaled $8.0 million; $3.6 million were loans to two borrowers in default under restructured terms, including a $3.2 million commercial borrower dependent on the coal industry. Management also disclosed newly impaired loans tied to a stalled development and a struggling automotive dealership.
- Interest-rate exposure is material. The company was liability-sensitive in the first year: its model estimated net interest income would decline 0.7% under an immediate 100- or 200-basis-point increase and 2.9% under a 100-basis-point decrease.
- Liquidity depends on deposits and access to wholesale funding, including FHLB advances. The filing identifies funding availability and cost, rising deposit rates, mortgage secondary-market access, local economic conditions, cybersecurity, regulation, and real-estate collateral values as risks.
- Off-balance-sheet commitments totaled $380.2 million, including $329.2 million available on lines of credit, $22.2 million in standby letters of credit, and $28.9 million in other loan commitments. The filing states commitments may expire undrawn.
- Adoption of lease accounting on January 1, 2019 was expected to add right-of-use assets of $12–$13 million and lease liabilities of $15–$16 million. The impact of CECL, effective in 2020, was still under evaluation and could be material.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported no material weaknesses. The company disclosed no legal proceedings believed likely to have a material adverse effect.
Investor verification priorities
- Confirm the sustainability of loan growth and net interest margin as funding costs rise, and review detailed asset-liability sensitivity assumptions.
- Track criticized, impaired, delinquent, and restructured loans, especially commercial real estate, development, and coal-related exposures; assess allowance adequacy against rapid portfolio growth.
- Reconcile reported FHLB capacity with existing advances and evaluate liquidity under deposit outflows or reduced wholesale funding access.
- Assess mortgage production, secondary-market execution, and fee-income trends after the 2018 volume decline.
- Verify the realized impact of CECL and lease-accounting adoption, and review securities’ unrealized losses and accumulated other comprehensive loss.