MVB Financial Corp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. MVB is a West Virginia-based financial holding company operating primarily through MVB Bank, with commercial and retail banking, mortgage banking, and holding-company segments. Financial amounts below are in U.S. dollars.
Financial results and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets | $1.944 billion | $1.751 billion |
| Loans held for investment, net | $1.363 billion | $1.293 billion |
| Deposits (excluding branch deposits held for sale) | $1.265 billion | $1.309 billion |
| Net interest income | $59.4 million | $52.1 million |
| Net income from continuing operations | $26.6 million | $12.0 million |
| Total net income | $27.0 million | $12.0 million |
| Diluted EPS, continuing operations | $2.16 | $1.00 |
| Cash and cash equivalents | $28.0 million | $22.2 million |
| Stockholders’ equity | $211.9 million | $176.8 million |
- Income and margins: Total interest income was $82.4 million and interest expense $23.0 million. Net interest margin improved to 3.47% from 3.41%, while net interest spread narrowed to 3.13% from 3.21%. Return on average assets and equity from continuing operations were 1.44% and 13.61%, respectively, versus 0.73% and 7.46%.
- Noninterest results: Noninterest income rose to $64.6 million from $38.6 million; noninterest expense rose to $87.2 million from $72.9 million. The efficiency ratio improved to 70.32% from 80.36%.
- Cash flow: Operating activities used $8.1 million, investing activities used $120.1 million, and financing activities provided $133.9 million. Year-end cash was $28.0 million. Negative operating cash flow occurred in a business with substantial mortgage loan origination and sale activity.
- Debt and liquidity: Year-end FHLB and other borrowings were $222.9 million, repurchase agreements $10.2 million, and subordinated debt $4.1 million. The Bank reported approximately $162.4 million of remaining FHLB borrowing capacity. Management said available cash, funding sources, and portfolio maturities were sufficient for liquidity needs.
- Capital and credit: The Bank’s CET1 ratio was 12.05%, total risk-based capital ratio 12.84%, and leverage ratio 9.94%; the Bank was categorized as well capitalized. Allowance for loan losses was $11.8 million, or 0.86% of gross loans. Nonperforming loans were 0.37% of gross loans, down from 0.54%; net charge-offs were 0.07% of gross loans.
Material changes versus 2018
- Continuing-operations net income more than doubled. Net interest income increased $7.3 million, supported by asset and loan growth, while the provision for loan losses fell by $0.7 million.
- Noninterest income increased $26.0 million, driven chiefly by a $13.5 million pretax valuation gain on a Fintech investment and an $8.7 million increase in mortgage fee income. Mortgage loan production and refinance activity strengthened as rates declined. These gains make reported earnings less representative of recurring banking income.
- Noninterest expense increased $14.3 million, including higher personnel, technology and professional costs, mortgage production costs, and expenses associated with the Fintech build-out and Chartwell acquisition.
- Total loans increased about $70 million, led by commercial and nonresidential real estate lending. Deposits declined $44.1 million at year-end, although noninterest-bearing deposits increased.
- Stockholders’ equity increased $35.2 million. The company redeemed $12.4 million of subordinated debt and converted a further $1.0 million to common stock; year-end subordinated debt fell to $4.1 million from $17.5 million.
Outlook, risks, and unusual items
- Management identified margin improvement, capital deployment, organic loan growth, and operating efficiency as priorities. It expects near-term loan activity to remain strong, but gave no quantitative earnings or growth guidance. Attracting core deposits to fund growth was identified as a key challenge.
- Interest-rate exposure is material. The company’s model estimated that an immediate 100-basis-point rate decrease would reduce 12-month net interest income by 6.9%; declines of 200 to 400 basis points exceeded policy limits. Management noted that mortgage refinancing fee income can partly offset lower net interest income in falling-rate conditions.
- The filing discusses COVID-19 and the Federal Reserve’s March 2020 rate cut as subsequent developments. Management expected lower rates to pressure net interest income, margins, and profitability; the pandemic’s broader effects were uncertain at filing date.
- Credit risks include geographic concentration in West Virginia and Virginia, a substantial commercial/nonresidential real estate portfolio, and increases in criticized loans: Special Mention balances rose to $25.2 million from $11.2 million and Substandard balances to $18.6 million from $12.4 million. Management highlighted several commercial borrowers with delayed refinancing, weak operating performance, or coal-industry exposure.
- On November 21, 2019, MVB agreed to sell assets and transfer deposits associated with four branches to Summit Community Bank. At year-end, $188.3 million of deposits and $42.9 million of loans were classified as held for sale. One additional branch closed in January 2020.
- MVB acquired Chartwell Compliance in September 2019 for approximately $4.1 million, including cash, stock, and contingent consideration. In March 2020, it agreed to combine MVB Mortgage’s origination operations with Intercoastal Mortgage; subject to approvals and closing conditions, MVB expected to retain a 47% common interest and $7.5 million of preferred units and cease consolidating the mortgage business.
- A $575,000 earn-out receipt related to the 2016 insurance-asset sale was recorded as discontinued-operations income. The company reported no legal proceedings expected to have a significant adverse financial effect. Auditors issued unqualified opinions on the financial statements and internal controls; management reported no material weaknesses.
Important facts for investors to verify
- How much of earnings growth is recurring after separating the $13.5 million Fintech valuation gain, stronger mortgage fees, and discontinued-operations income.
- The valuation basis, liquidity, and concentration of Fintech investments, and the performance and integration costs of Chartwell.
- Final terms, timing, and financial impact of both the Summit branch transfer and the proposed Intercoastal mortgage combination.
- Deposit trends and funding costs after the branch transfer, including the stability of large Fintech-related deposit relationships and actual available FHLB capacity.
- Credit quality and collateral performance in commercial real estate and other criticized exposures, including coal-related borrowers and loans dependent on refinancing.
- Realized effects of falling rates and COVID-19 on net interest income, mortgage activity, credit losses, liquidity, and capital; also monitor implementation of CECL, which the filing said was delayed for smaller reporting companies until 2023.