MVB Financial Corp. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed March 9, 2016. MVB is a West Virginia-based financial holding company operating community banking, mortgage banking and insurance businesses, primarily in West Virginia and Virginia.
Business context
The company operated 13 full-service bank branches, 12 mortgage-only offices and insurance offices, with 371 full-time-equivalent employees. In August 2015, the Bank acquired two Susquehanna Bank branches in Berkeley County, West Virginia, assuming approximately $69 million of deposits and $17 million of loans. The company’s four reportable segments are commercial and retail banking, mortgage banking, financial holding company and insurance services.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets, year-end | $1.384 billion | $1.110 billion |
| Loans held for investment, year-end | $1.032 billion | $798.3 million |
| Loans held for sale, year-end | $102.6 million | $69.5 million |
| Deposits, year-end | $1.012 billion | $823.2 million |
| Stockholders’ equity, year-end | $114.7 million | $109.4 million |
| Net interest income | $34.9 million | $28.7 million |
| Net income | $6.8 million | $2.1 million |
| Net income available to common shareholders | $6.2 million | $1.7 million |
| Basic / diluted EPS | $0.78 / $0.76 | $0.22 / $0.22 |
| Net interest margin | 3.07% | 3.01% |
| Return on average assets / equity | 0.56% / 6.08% | 0.20% / 2.01% |
Interest income rose 21.9% to $44.1 million; interest expense increased to $9.2 million, including $2.2 million of subordinated-debt interest. Noninterest income increased to $39.7 million, led by mortgage fees, while noninterest expense rose to $62.2 million, including personnel, occupancy, data-processing and professional costs. The provision for loan losses was $2.5 million. The company reported a 83.60% efficiency ratio, compared with 91.59% in 2014.
Mortgage banking originated volume increased 47.5%; mortgage fee income rose to $29.5 million from $17.6 million. The commercial and retail banking segment earned $6.0 million (2014: $4.8 million); mortgage banking earned $3.8 million (2014: loss of $149,000); insurance earned $81,000 (2014: loss of $624,000). The financial holding company segment posted a $3.1 million loss, versus a $2.0 million loss.
Cash and cash equivalents were $29.1 million at year-end, down from $30.1 million. Operating cash flow was negative $21.5 million, investing cash flow negative $174.9 million, and financing cash flow positive $195.4 million. Operating cash flow was substantially affected by the mortgage business’s high loan-origination and sale volumes. Cash flow from financing included deposit growth and increased short-term FHLB borrowing.
Total borrowings and repurchase agreements were approximately $244.2 million at year-end, including $183.2 million of FHLB and other borrowings, $27.4 million of repurchase agreements and $33.5 million of subordinated debt. Deposits funded 80.6% of reported funding sources. FHLB borrowing capacity remaining was approximately $221.8 million. Regulatory capital ratios remained above well-capitalized thresholds: consolidated total risk-based capital 13.0%, Tier 1 9.5%, CET1 7.6% and leverage 7.8%. The Bank was categorized as well capitalized.
Credit quality was mixed: nonperforming loans were 0.99% of gross loans, down from 1.16% in 2014, and net charge-offs were 0.07% of gross loans, down from 0.16%. However, impaired loans increased to $15.4 million from $14.8 million; two unrelated credits represented $8.3 million of the 2015 impaired-loan balance. The allowance for loan losses was $8.0 million, or 0.78% of gross loans.
Material changes versus 2014
- Net income increased by $4.7 million, principally as loan growth lifted net interest income and higher mortgage production increased fee income.
- Loans held for investment increased $233.9 million; deposits increased $189.1 million. The two acquired branches contributed to balance-sheet growth.
- Noninterest income rose $14.2 million, while noninterest expense increased $12.6 million. The company cited growth-related staffing, commissions, offices, technology and professional costs.
- The net interest margin improved six basis points to 3.07%, although funding costs rose three basis points and management continued to note competitive pricing pressure.
- Consolidated total risk-based capital declined from 16.4% to 13.0%, and equity-to-assets declined from 9.86% to 8.29%, amid rapid balance-sheet growth and changed regulatory capital requirements. The company reported that it remained above regulatory minimums.
Outlook, risks and unusual items
Management said commercial and retail loan production remained strong and expected loan activity to remain strong in the near term, but gave no quantified earnings, revenue or margin guidance. Its stated priorities were margin improvement, capital leverage, organic loan growth and operating efficiency; it identified attracting core deposits to fund growth as a key challenge.
- Credit and geographic concentration: About 81.3% of loans were real-estate-related, and 70.6% were commercial and nonresidential real estate loans. The company is concentrated in West Virginia and Virginia; management also identified exposure to local real estate and economic conditions. Energy-related balances were 1.6% of loans, including production and energy-service borrowers.
- Specific problem credits: A $3.3 million impaired loan depended on the coal industry. A $5.0 million Northern Virginia commercial real estate loan was affected by government-contractor tenants vacating after losing federal contracts. The Bank asserted the seller breached the loan-sale agreement and was pursuing legal recourse.
- Mortgage dependence: Mortgage profitability depends on origination volume and a functioning secondary market, including programs and purchases by Fannie Mae, Freddie Mac and other investors.
- Interest-rate and funding risk: Management characterized the balance sheet as asset-sensitive. Its model estimated net interest income would rise 1.5% under an immediate 100-basis-point increase and 3.8% under a 200-basis-point increase, but fall 2.0% under a 100-basis-point decrease. These are model estimates, not forecasts.
- Preferred-stock cost: The SBLF preferred stock carried a 1% dividend rate through March 2016; if not retired, the rate would increase to 9%, potentially affecting liquidity and common-shareholder returns. Preferred dividends were $575,000 in 2015.
- Other risks and contingencies: The filing highlights regulatory and compliance costs, cybersecurity and vendor risks, competition, and dependence on FHLB and other funding. Off-balance-sheet commitments totaled $261.9 million, primarily available lines of credit; the filing notes these may not be drawn. Management said ordinary-course legal matters were not expected to have a significant adverse effect, apart from the specific loan-sale dispute noted above.
- Unusual items: 2015 included $722,000 of branch-acquisition costs. 2014 included a $706,000 expense from refining the estimate for mortgage interest-rate lock commitments. In 2015, the company sold a held-to-maturity security after a credit downgrade. Auditors issued unqualified opinions on the financial statements and internal controls; management reported no material weaknesses.
Most important facts for investors to verify
- Whether loan growth can be funded with stable core deposits rather than materially greater FHLB borrowing, and how the acquired branches perform.
- Current status, collateral values and loss exposure for the coal-related and Northern Virginia impaired credits, including the legal claim against the loan seller.
- Whether mortgage origination and secondary-market execution can sustain fee income as refinancing volume and market conditions change.
- Capital and liquidity effects of continued asset growth, the increase in borrowing, and the SBLF preferred dividend step-up after March 2016.
- Whether the reported improvement in earnings and efficiency persists given rising operating costs, the low return on assets, and the increase in diluted weighted-average shares.