MVB Financial Corp. — FY2017 Form 10-K
Business context and reporting period. MVB Financial is a West Virginia financial holding company operating primarily through MVB Bank, with community and retail banking and mortgage banking as its principal businesses. This annual report covers the year ended December 31, 2017; fourth-quarter results are also summarized below. The company operated 14 full-service branches and 10 mortgage offices, principally in West Virginia and Virginia.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total assets at year-end | $1.534 billion | $1.419 billion |
| Gross loans at year-end | $1.105 billion | $1.052 billion |
| Deposits at year-end | $1.160 billion | $1.107 billion |
| Net interest income | $44.3 million | $43.0 million |
| Net interest margin | 3.27% | 3.22% |
| Noninterest income | $40.7 million | $43.2 million |
| Noninterest expense | $70.5 million | $69.2 million |
| Provision for loan losses | $2.2 million | $3.6 million |
| Net income from continuing operations | $7.6 million | $9.0 million |
| Basic / diluted continuing-operations EPS | $0.69 / $0.68 | $0.96 / $0.92 |
| Cash and cash equivalents at year-end | $20.3 million | $17.3 million |
| Stockholders’ equity at year-end | $150.2 million | $145.6 million |
Profitability and cash flow. Return on average assets from continuing operations was 0.52% (0.63% in 2016); return on average equity was 5.23% (7.30%). The efficiency ratio increased to 82.94% from 80.29%. Operating cash flow was $33.1 million, investing cash flow was negative $136.1 million, and financing cash flow was $105.9 million. Cash rose by $3.0 million during the year.
Funding and capital. At year-end, deposits were the primary funding source. FHLB and other borrowings were $152.2 million, repurchase agreements $22.4 million, and subordinated debt $33.5 million. Consolidated regulatory capital ratios were 14.9% total risk-based, 11.5% Tier 1 risk-based, 10.6% common equity Tier 1, and 9.3% leverage; the Bank was reported as well capitalized. The company declared $0.10 per common share in dividends for 2017.
Material changes versus FY2016
- Continuing-operations net income fell $1.4 million, and diluted continuing EPS declined from $0.92 to $0.68. FY2016 total net income included $3.9 million of after-tax discontinued-operations income from the insurance asset sale; FY2017 had none.
- Net interest income increased 3.0%, supported by higher earning-asset yields and growth in taxable securities and commercial loans. Interest expense also rose, including higher deposit and borrowing costs.
- Noninterest income declined $2.5 million, mainly because derivative results swung from a $1.5 million gain to a $2.7 million loss. Mortgage production volume decreased 6.2%, and management reported a 39% decline in the locked mortgage pipeline.
- Mortgage Banking segment earnings declined to $1.6 million from $3.1 million. Commercial and retail banking segment earnings increased to $10.3 million from $9.9 million.
- Gross loans grew approximately 5.1%, deposits 4.7%, and total assets 8.1%. FHLB and other borrowings increased by approximately $61.2 million.
- Asset-quality indicators weakened: nonperforming loans were 0.88% of gross loans versus 0.59%; nonperforming assets were 0.72% of assets versus 0.47%. The allowance for loan losses increased to $9.9 million, while coverage of nonperforming loans declined to 101.85% from 146.11%.
Outlook, commentary, risks, and unusual items
- Management identified priorities of margin improvement, leveraging capital, organic loan growth, and operating efficiency. It expected loan activity to remain strong in the near term and identified attracting core deposits to fund growth as a key challenge. No numeric earnings or revenue guidance was provided.
- The company was liability-sensitive in its first-year interest-rate modeling. A modeled immediate 100-basis-point increase reduced 12-month net interest income by 1.6%; a 200-basis-point increase reduced it by 3.2%. Management cautioned that actual results may differ from model assumptions.
- The Tax Cuts and Jobs Act required a $646,000 charge to remeasure deferred tax assets. Management estimated the new tax law could reduce the effective tax rate going forward, but noted outcomes depend on future income, expenses, and tax interpretations.
- Mortgage profitability depends on origination volume and access to a functioning secondary market. The company also cited concentrated regional exposure, substantial commercial and real-estate lending, credit-loss estimation uncertainty, competition, regulatory requirements, cybersecurity and vendor risks, and funding/liquidity risks.
- Unusual developments included completion of a core banking-system conversion in April 2017, Nasdaq listing in December 2017, redemption of $8.5 million of SBLF preferred stock, and a $4.9 million net common-stock issuance. Two new branches opened during 2017; two Martinsburg branches were consolidated in December.
- Management reported no material legal proceedings and no material weaknesses in internal control. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether mortgage production, derivative performance, and the locked-loan pipeline stabilize, and how these affect mortgage segment earnings.
- Credit quality and loss reserves, especially the growth in impaired loans, nonperforming loans, and foreclosed real estate; assess the largest criticized commercial relationships.
- Deposit growth, deposit pricing, reliance on FHLB borrowing, and liquidity capacity as loans and funding costs change.
- Actual margin and earnings sensitivity to interest-rate movements compared with management’s modeled scenarios.
- The realized tax impact of the 2017 tax-law changes and any subsequent adjustments to deferred tax balances.
- Potential dilution and capital implications of outstanding convertible securities, stock options, and future capital needs; confirm dividend capacity under regulatory restrictions.