MVB FINANCIAL CORP annual report, FY2021

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MVB Financial Corp. — 2021 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2021; comparisons are primarily with 2020. MVB is a West Virginia financial holding company operating through MVB Bank, with community and retail banking, nationwide Fintech banking, mortgage-related equity investments, and technology and compliance businesses. Its reportable segments are CoRe banking, mortgage banking, and financial holding company.

During 2021, MVB established Edge Ventures, acquired 80% interests in Flexia and Trabian, increased its Interchecks ownership to 16.9%, and sold four West Virginia branches to Summit. The branch sale generated a $10.8 million pretax gain.

Financial performance and condition

  • Earnings: Net income was $39.1 million, up from $37.4 million; diluted EPS was $3.10 versus $3.06. Pretax income was $48.6 million. Fourth-quarter net income was $10.0 million and diluted EPS was $0.77, compared with $11.8 million and $0.97 in fourth-quarter 2020.
  • Net interest income and margins: Net interest income rose 12.1% to $77.2 million. Tax-equivalent net interest margin declined to 3.26% from 3.57% as earning-asset yields fell faster than funding costs. Yield on earning assets was 3.52% versus 4.17%; cost of interest-bearing liabilities fell to 0.44% from 0.85%.
  • Noninterest income and expense: Noninterest income fell to $62.6 million from $91.8 million, primarily reflecting the loss of mortgage origination fees after the 2020 ICM combination and lower ICM equity-method income. Growth in compliance/consulting and card/service-charge income partly offset the decline. Noninterest expense was essentially flat at $97.5 million versus $97.1 million.
  • Credit costs and asset quality: MVB released $6.3 million of loan-loss provision in 2021, versus a $16.6 million provision in 2020; net charge-offs were $1.3 million. Nonperforming loans were $18.0 million, or 0.9% of gross loans, compared with $13.7 million and 0.9%. The allowance was $18.3 million, approximately 1.0% of loans, down from $25.8 million, or 1.8%.
  • Balance sheet and liquidity: Total assets grew to $2.79 billion from $2.33 billion. Loans increased to $1.87 billion from $1.45 billion; deposits rose to $2.38 billion from $1.98 billion. Noninterest-bearing deposits reached $1.12 billion, or 47.1% of deposits, versus $715.8 million, or 36.1%. Cash and cash equivalents were $307.4 million, up from $263.9 million.
  • Cash flow: Operating cash flow was $34.8 million; investing activities used $572.0 million, largely reflecting loan growth and securities activity; financing activities provided $580.7 million, principally from deposit growth and subordinated debt issuance.
  • Debt and capital: Subordinated debt was $73.0 million, including $30 million issued in September; repurchase agreements were $11.4 million. There were no FHLB borrowings outstanding at year-end, and reported remaining FHLB borrowing capacity was $432.9 million. The Bank’s total risk-based capital ratio was 16.7%, CET1 was 15.8%, and leverage ratio was 11.6%, above well-capitalized thresholds. Consolidated equity-to-assets declined to 9.8% from 10.3%.
  • Returns and shareholder distributions: Return on average assets was 1.5% versus 1.7%; return on average equity was 15.6% versus 16.7%. The 2021 common dividend was $0.51 per share, compared with $0.36 in 2020.

Material changes versus 2020

  • Loan growth and the increase in low-cost deposits supported higher net interest income, but the margin contracted amid low rates and lower asset yields.
  • Reported noninterest income declined sharply, largely because mortgage activity shifted to the ICM equity-method investment; 2021 also included the $10.8 million branch-sale gain and $3.8 million in equity-security holding gains.
  • The swing from a substantial 2020 loan-loss provision to a 2021 release materially supported earnings. Management attributed the release to improving credit indicators and revisions to its qualitative-factor framework.
  • Commercial and non-residential real estate loans remained the dominant exposure, about 80% of loans. Growth included PPP lending and loans purchased through strategic lending partners; consumer loans also expanded substantially, including subprime auto exposure.
  • The preferred stock was redeemed in January 2021. Subordinated debt increased during the year, while the Bank had no year-end FHLB advances.

Outlook, risks, contingencies, and unusual items

  • Management expects near-term loan activity and Fintech banking to grow, and is focused on margin improvement, loan growth, deposit acquisition, fee income, and operating efficiency. The filing does not provide formal numerical earnings or revenue guidance.
  • Management described continued pressure on net interest income from the low-rate environment, while noting that the Bank was asset-sensitive in the first year of its year-end rate analysis. A modeled +100-basis-point shock showed a 10.4% increase in net interest income; a -100-basis-point shock showed a 9.2% decline. Modeled declines of 200–400 basis points exceeded policy limits.
  • Material risks include dependence on gaming and other Fintech-related deposits, including the possibility that large or concentrated balances leave or require higher rates; commercial real estate and other commercial credit exposure; purchased-participation and subprime auto credit risk; interest-rate and inflation uncertainty; COVID-19 effects; cybersecurity, vendor, regulatory, and compliance risks; and execution risk in new Fintech ventures.
  • The filing says 2021 loan growth, deposit growth, and certain investment gains may not persist. The allowance is based on significant estimates; the auditor identified it as a critical audit matter. MVB expects to adopt CECL in 2023, but stated that the impact could not yet be reasonably estimated.
  • The company reported no material pending legal proceedings and no material weaknesses in internal control. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
  • The filing reports differing year-end balances for COVID-related modified mortgage loans: $2.1 million in the MD&A discussion and $10.8 million in Note 3. The filing text does not provide a clear reconciled value.

Important facts for investors to verify

  • How much of deposit growth and the 47.1% noninterest-bearing deposit share is concentrated in gaming and other Fintech clients, and how stable are those balances?
  • Whether earnings are sustainable after considering the loan-loss release, branch-sale gain, equity-security gains, PPP fee accretion, and the change in mortgage-related income presentation.
  • Credit performance of purchased commercial participations, commercial real estate borrowers, and the enlarged subprime auto portfolio; also monitor nonperforming loans and criticized balances.
  • The effect of rate changes on net interest margin and earnings, including the modeled downside scenarios that exceeded policy limits.
  • The eventual CECL adoption impact, the quality and valuation of Fintech investments, and the company’s ability to scale these businesses profitably.
  • Reconcile the inconsistent mortgage-modification balances and review the full notes for contingencies, commitments, and related-party exposures.