MVB Financial Corp. — 2014 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2014; fourth-quarter results are also discussed. MVB is a West Virginia financial holding company operating community banking, mortgage banking and insurance businesses, primarily in West Virginia and the Washington, D.C. region. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets, year-end | $1,110.5 | $987.1 |
| Total loans, year-end | $798.3 | $622.3 |
| Total deposits, year-end | $823.2 | $695.8 |
| Net interest income | $28.3 | $21.4 |
| Net interest margin | 2.99% | 2.99% |
| Net income | $2.1 | $4.0 |
| Net income available to common shareholders | $1.7 | $3.9 |
| Basic / diluted EPS | $0.22 / $0.22 | $0.59 / $0.57 |
| Operating cash flow | $24.9 | $1.2 |
| Cash and cash equivalents, year-end | $30.1 | $39.8 |
| Stockholders’ equity, year-end | $109.4 | $94.0 |
Net interest income rose 32.3%, largely reflecting growth in average loans and earning assets. Total operating income was $62.3 million and noninterest expense was $49.7 million. Provision for loan losses was $2.6 million. Return on average assets was 0.20% and return on average equity was 2.01%, down from 0.51% and 5.11%, respectively, in 2013.
Cash flow from investing was an outflow of $151.9 million, principally reflecting loan growth; financing activities provided $117.2 million. Cash and cash equivalents decreased $9.8 million during the year. The filing states management believed liquidity was adequate, supported by cash, deposit funding, asset maturities and access to borrowing sources.
Year-end liabilities included $101.3 million of FHLB and other borrowings, $32.7 million of repurchase agreements and $33.5 million of subordinated debt. The Bank’s regulatory capital ratios were above well-capitalized thresholds: total risk-based capital 15.4%, Tier 1 risk-based capital 14.6% and Tier 1 leverage 10.8%.
Changes versus 2013
- Net income fell by $1.9 million; higher net interest income was offset by lower noninterest income and increased expenses.
- Loans grew $176.0 million (about 28%) and deposits grew $127.4 million (about 18%). Commercial and nonresidential real estate loans increased to $560.8 million; residential real estate and home equity loans rose to $220.4 million.
- Noninterest income declined to $25.9 million from $28.4 million, including lower gains on loans held for sale and reduced servicing income. Insurance income increased $1.8 million, partly because 2014 included a full year of results versus seven months in 2013.
- Noninterest expense increased to $49.7 million from $42.6 million, driven principally by staffing, new locations, occupancy, data processing and FDIC insurance costs.
- Mortgage banking segment earnings fell to $0.1 million from $2.0 million; commercial and retail banking earnings were approximately $2.2 million in both years; insurance segment losses widened to $0.6 million from $0.3 million.
Outlook, risks and unusual items
- Management cited strong commercial and retail loan production and expects loan activity to remain strong in the near term. Its stated priorities are margin improvement, using capital efficiently, organic loan growth and operating efficiency. Management identified attracting core deposits to fund expansion as a key challenge. No numerical earnings or revenue guidance is provided.
- Credit quality weakened materially: nonperforming loans rose to $9.3 million, or 1.16% of loans, from $0.8 million, or 0.14%. Loans more than 30 days past due increased to $26.6 million from $2.8 million. The allowance for loan losses was $6.2 million, or 67.2% of nonperforming loans; net charge-offs were $1.3 million.
- Management attributed a substantial portion of impaired-loan growth to a $3.6 million credit exposed to coal-industry conditions and a $5.0 million Northern Virginia commercial property loan whose government-contractor tenants vacated. MVB alleges the selling institution breached the loan sale agreement and is pursuing legal recourse.
- Mortgage originations declined 17.1%. A fourth-quarter refinement in the estimate for interest-rate lock commitments resulted in a one-time $706,000 expense. The fourth quarter recorded a $585,000 net loss versus $591,000 net income in the prior-year quarter.
- The Company issued $29.4 million of 10-year convertible subordinated notes in June 2014, with stated interest rates generally of 7% to 7.5%, and issued $7.8 million of preferred stock. These funding sources increased capital but also added interest and preferred-dividend costs.
- The planned purchase of certain CFG Community Bank assets and liabilities was terminated by mutual agreement in October 2014; the filing reports no continuing obligations under that agreement.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the 2014 financial statements and internal controls. Management identified allowance-for-loan-loss estimation as a particularly judgmental accounting area.
Important facts for investors to verify
- Whether the rise in past-due, impaired and nonperforming loans is contained, and whether the allowance remains adequate as the loan portfolio expands.
- Recoverability, collateral values and legal status of the coal-related and Northern Virginia commercial real estate credits, including the asserted loan-sale agreement claim.
- Whether mortgage and insurance expansion can produce sustainable profitability after added staffing and location costs, given weaker mortgage originations and the rate-lock estimate adjustment.
- Core deposit growth, borrowing needs and the cost and terms of subordinated debt and preferred stock; also confirm regulatory capital and liquidity remain adequate.
- The filing contains some differing descriptive figures across sections, including branch counts and certain capital or equity summaries; verify detailed values against the audited financial statements and notes.