MVB Financial Corp. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter results also disclosed. MVB is a West Virginia-based financial holding company focused on community banking and mortgage banking, serving West Virginia and Virginia markets and mortgage customers in the broader Mid-Atlantic and Southeast. The filing is audited; the auditor issued an unqualified opinion on the financial statements and internal controls.
Financial performance and condition
- Earnings: Continuing-operations net income was $9.0 million, up from $6.6 million in 2015. Total net income, including discontinued operations, was $12.9 million versus $6.8 million; diluted EPS was $1.31 versus $0.77. Continuing-operations diluted EPS was $0.92 versus $0.74.
- Revenue and margins: Net interest income rose 23.3% to $43.0 million; net interest margin improved to 3.22% from 3.07%. Noninterest income increased to $43.2 million from $35.0 million, led by mortgage fees. Noninterest expense rose to $69.2 million from $57.8 million. The efficiency ratio improved to 80.29% from 82.84%.
- Credit costs: Provision for loan losses increased to $3.6 million from $2.5 million. Net charge-offs were $2.5 million, or 0.24% of gross loans, compared with $0.7 million, or 0.07%, in 2015. Nonperforming loans improved to 0.59% of gross loans from 0.99%; the allowance was $9.1 million, 0.86% of gross loans.
- Balance sheet: Assets were $1.419 billion, loans held for investment were $1.053 billion, and deposits were $1.107 billion at year-end. Loans grew $20.7 million and deposits grew $94.7 million from 2015. Stockholders’ equity was $145.6 million.
- Funding and debt: Year-end FHLB and other borrowings were $90.9 million, down from $183.2 million; repurchase agreements were $25.2 million and subordinated debt was $33.5 million. Deposits represented 88.1% of funding sources. The Bank had approximately $326.9 million of remaining FHLB borrowing capacity.
- Liquidity and cash flow: Cash and cash equivalents declined to $17.3 million from $29.1 million. Operating cash flow was $25.3 million, investing cash outflow was $56.0 million and financing cash inflow was $18.9 million. Management said available cash, funding access, and near-term portfolio maturities were adequate for liquidity needs.
- Capital: Consolidated CET1, Tier 1 risk-based, total risk-based and leverage ratios were 10.1%, 11.9%, 15.4% and 9.5%, respectively; the Bank was classified as well capitalized.
Material changes versus 2015
- Continuing earnings rose $2.4 million, mainly reflecting higher net interest income from loan growth. Average loans and loans held for sale increased by $179.0 million.
- Mortgage fee income rose to $35.7 million from $29.5 million, while mortgage segment earnings fell to $3.1 million from $3.8 million. Higher staffing and commissions, including a $1.8 million increase in acquisition-related earn-out expense, outweighed much of the fee growth.
- Credit quality measures improved overall, including lower nonperforming loans and past-due loans, although provision expense and net charge-offs increased.
- The Company sold substantially all MVB Insurance assets to USI on June 30, 2016, recording a $6.9 million pretax gain. After-tax discontinued-operations income was $3.9 million, materially contributing to total earnings.
- A December private placement of 1,913,044 common shares generated approximately $22 million gross and $20.5 million net proceeds. Equity increased, while common shareholders experienced dilution.
- All remaining held-to-maturity securities, $52.4 million, were reclassified as available-for-sale in the first quarter. Year-end securities had $3.8 million of gross unrealized losses; management described these as temporary and said it did not intend to sell at those values.
Fourth quarter, outlook and risks
Fourth-quarter 2016 net income was $2.3 million versus $1.4 million in fourth-quarter 2015; diluted EPS was $0.22 versus $0.15. Net interest income increased to $10.8 million from $9.9 million, while noninterest expense rose to $16.8 million from $14.7 million. Fourth-quarter results included continuing business activity; the insurance business had been sold earlier in the year.
Management gave no quantified earnings or growth guidance. It said loan production remained strong and expected loan activity to remain strong in the near term. Priorities include margin improvement, leveraging capital, organic loan growth and operating efficiency; management identified attracting core deposits to fund growth as a key challenge.
- Key exposures include concentration in West Virginia and Virginia, commercial and real-estate lending, borrower and collateral performance, and the energy industry. Coal and natural-gas production loans totaled $7.3 million at year-end.
- Interest-rate risk is significant. The Company was asset-sensitive; its model estimated a 3.8% increase in 12-month net interest income under an immediate 100-basis-point rate increase and a 5.8% decrease under a 100-basis-point decline. These are modeled estimates, not forecasts.
- Mortgage profitability depends on origination volume and access to a functioning secondary market. Competition, rising funding costs, regulatory requirements, cyber threats, vendor dependence and the adequacy of the loan-loss allowance are additional risks.
- The Company accrued a $300,000 core-vendor termination fee in 2016. It reported no legal proceedings believed likely to have a material adverse effect and no material weaknesses in internal control.
- On January 5, 2017, the Company redeemed its $8.5 million Series A SBLF preferred stock, including accrued dividends, and terminated its SBLF participation. Management stated capital ratios remained well above well-capitalized requirements.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from the $6.9 million pretax insurance-sale gain and other nonrecurring items.
- Review mortgage segment margins and expense growth, including the acquisition-related earn-out, as origination volume changes.
- Track credit trends, particularly commercial real estate and acquisition-and-development exposures, charge-offs, criticized loans, and the allowance relative to portfolio growth.
- Assess deposit growth and funding costs against loan growth, liquidity needs and the reduction in FHLB borrowings.
- Confirm post-redemption capital levels, preferred-stock obligations and the effect of the common-share issuance and outstanding convertible subordinated debt on dilution and per-share earnings.
- Review sensitivity to falling and rising rates and the assumptions underlying management’s interest-rate and credit-loss models.