MVB Financial(MVBF) - 2018 Q4 - Annual Report

Part I Business MVB Financial Corp. operates as a financial holding company primarily through MVB Bank, Inc., focusing on community and mortgage banking in West Virginia and Virginia, subject to extensive regulation Corporate and Business Overview MVB Financial Corp. is a financial holding company operating through MVB Bank and its subsidiaries, focusing on community and mortgage banking, and Fintech investments - MVB Financial Corp. is a financial holding company whose principal subsidiary is MVB Bank, Inc. The bank's operating subsidiaries include MVB Mortgage, MVB Insurance, LLC, and MVB Community Development Corporation[11] - The company's main business activities are community banking and mortgage banking, leveraging Fintech investments to provide services to corporate clients across the U.S[16] - The company operates through three reportable segments: commercial and retail banking, mortgage banking, and a financial holding company[19] Primary Market Area and Lending Activities The company's primary market spans West Virginia and Virginia, with a loan portfolio heavily concentrated in commercial loans (72.2%) and real estate loans (27.1%) as of 2018 - The company's primary market area consists of Marion, Harrison, Jefferson, Berkeley, Monongalia, and Kanawha counties in West Virginia, and Fairfax and Loudoun counties in Virginia[20] Loan Portfolio Composition as of December 31, 2018 | Loan Category | Amount (millions) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Commercial Loans | $941.0 | 72.2% | | Real Estate Loans | $353.9 | 27.1% | | Consumer Loans | $9.6 | 0.7% | Unemployment Rates in Primary Market Areas (December) | County | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Berkeley County, WV | 3.5% | 3.6% | 3.0% | | Harrison County, WV | 4.3% | 4.6% | 4.9% | | Jefferson County, WV | 3.0% | 3.0% | 2.6% | | Marion County, WV | 4.9% | 5.4% | 5.1% | | Monongalia County, WV | 3.7% | 3.5% | 3.3% | | Kanawha County, WV | 4.5% | 5.1% | 4.7% | | Fairfax County, VA | 2.1% | 2.6% | 3.0% | | Loudoun County, VA | 2.1% | 2.7% | 3.0% | Supervision and Regulation The company and its subsidiaries are extensively regulated by federal and state authorities, including the Federal Reserve Board and FDIC, with regulations governing capital, dividends, and consumer protection - The company is regulated as a financial holding company by the Federal Reserve Board, while its subsidiary, MVB Bank, is a West Virginia state-chartered bank primarily regulated by the West Virginia Division of Financial Institutions and the FDIC[45][46] - The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) of 2018 modified certain provisions of the Dodd-Frank Act, easing regulations for banks with less than $10 billion in assets, including simplifying capital calculations and exempting certain mortgage loans from ability-to-repay requirements[42][43] - The company qualifies under the Federal Reserve Board's Small Bank Holding Company Policy Statement, exempting it from consolidated capital requirements and subjecting it to a debt-to-equity ratio requirement of 1.0:1 or less to be considered well capitalized[53] Minimum Capital Ratios under Capital Rules (Effective Jan 1, 2015) | Capital Measure | Minimum Ratio | | :--- | :--- | | Common Equity Tier 1 (CET1) to risk-weighted assets | 4.5% | | Tier 1 capital to risk-weighted assets | 6.0% | | Total capital to risk-weighted assets | 8.0% | | Tier 1 capital to average consolidated assets (leverage ratio) | 4.0% | - As of January 1, 2019, the fully phased-in Capital Rules require the Bank to maintain a capital conservation buffer of 2.5% of CET1, effectively increasing the minimum ratios for CET1, Tier 1, and Total capital to 7.0%, 8.5%, and 10.5%, respectively[76] Risk Factors The company faces significant risks from economic conditions in its primary markets, loan portfolio concentration, intense competition, regulatory changes, and cybersecurity threats Risks Related to Economic and Market Conditions The company's financial performance is highly dependent on local economic conditions in West Virginia and Virginia, with 77.7% of its loan portfolio concentrated in real estate in these markets - The company's business is highly dependent on the general economic conditions of West Virginia and Virginia, making it susceptible to local economic downturns[116][120] - Nearly 77.7% of the company's total loan portfolio consists of real estate interests concentrated in West Virginia and Virginia, exposing it to risks from declining real estate values in these markets[122] Risks Related to Our Business Business risks include high nonresidential real estate loan concentration, reliance on the secondary mortgage market, interest rate sensitivity, competition, and cybersecurity threats - Nonresidential real estate loans, which constitute 72.9% of the loan portfolio, expose the company to greater risks of nonpayment and loss compared to residential mortgage loans[125] - The profitability of MVB Mortgage is highly dependent on the existence of an active secondary market and its ability to sell originated mortgage loans, particularly to government-sponsored enterprises like Fannie Mae and Freddie Mac[127][128] - The company faces substantial competition from larger national, regional, and community banks, as well as non-bank financial institutions, which may have greater resources and fewer regulatory constraints[137] - The company relies on information systems for its operations and is subject to cybersecurity risks, including cyber-attacks that could disrupt business, compromise customer data, and result in financial losses or reputational damage[149][153] Risks Related to the Legal and Regulatory Environment The company faces risks from extensive government regulation, changes in tax laws like the Tax Cuts and Jobs Act of 2017, and the need to meet stringent capital adequacy guidelines - The company is subject to extensive government regulation and supervision, and changes in laws or policies, such as the Dodd-Frank Act, could impose additional costs and limit business activities[164] - The Tax Cuts and Jobs Act of 2017 significantly changed U.S. tax laws, affecting the company's performance, resulting in an income tax charge of $646 thousand for the year ended December 31, 2017[163] - Failure to meet regulatory capital adequacy guidelines could materially and adversely affect the company's financial condition and compromise its status as a financial holding company[166] Properties As of December 31, 2018, the company operated 15 full-service banking branches (8 owned, 7 leased) and 11 leased mortgage-only offices, with its main office owned in Fairmont, West Virginia - The company owns its main office in Fairmont, West Virginia, and operates a total of 15 full-service banking branches (8 owned, 7 leased) and 11 mortgage-only offices (all leased)[176] Legal Proceedings The company is involved in routine legal claims but is unaware of any proceedings expected to have a material adverse effect on its financial condition or operations - The company is not aware of any asserted or unasserted legal proceedings or claims that would have a material adverse effect on its financial condition or results of operations[179] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the company's common stock trading on Nasdaq, including quarterly market data, dividends, and a five-year performance comparison against key indices Quarterly Market and Dividend Information (per share) | Quarter | 2018 High | 2018 Low | 2018 Dividend | 2017 High | 2017 Low | 2017 Dividend | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | First | $20.00 | $17.86 | $0.025 | $14.00 | $12.70 | $0.025 | | Second | $19.75 | $17.73 | $0.025 | $13.25 | $12.55 | $0.025 | | Third | $19.45 | $16.24 | $0.030 | $18.90 | $13.05 | $0.025 | | Fourth | $19.53 | $17.11 | $0.030 | $20.40 | $18.26 | $0.025 | Five-Year Performance Graph (Cumulative Total Return) | Index | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | MVB Financial Corp. | $100.00 | $90.78 | $79.88 | $78.55 | $123.13 | $111.39 | | KBW Bank Index | $100.00 | $107.22 | $105.52 | $132.53 | $154.07 | $123.87 | | Russell 2000 | $100.00 | $103.53 | $97.62 | $116.63 | $131.96 | $115.89 | Selected Financial Data This section provides a five-year summary of key consolidated financial data, including balance sheet, income statement, per share, and asset quality ratios, along with a tangible book value reconciliation Selected Financial Data (2016-2018) | (Dollars in thousands except per share data) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Balance Sheet Data: | | | | | Total Assets | $1,750,969 | $1,534,302 | $1,418,804 | | Loans, net | $1,293,427 | $1,096,063 | $1,043,764 | | Deposits | $1,309,154 | $1,159,580 | $1,107,017 | | Stockholders' equity | $176,773 | $150,192 | $145,624 | | Income Statement Data: | | | | | Net interest income | $52,054 | $44,297 | $42,991 | | Net Income | $12,003 | $7,575 | $12,912 | | Net Income available to common shareholders | $11,514 | $7,077 | $11,784 | | Per Share Data: | | | | | Earnings per share per common shareholder - diluted | $1.00 | $0.68 | $1.31 | | Cash dividends | $0.11 | $0.10 | $0.08 | | Book value | $14.55 | $13.63 | $12.93 | | Asset Quality Ratios: | | | | | Nonperforming loans to gross loans | 0.54% | 0.88% | 0.59% | | Net charge-offs to gross loans | 0.11% | 0.13% | 0.24% | | Selected Ratios: | | | | | Return on average assets - continuing operations | 0.73% | 0.52% | 0.63% | | Return on average equity - continuing operations | 7.46% | 5.23% | 7.30% | Non-GAAP Financial Measure Reconciliation: Tangible Book Value | (Dollars in thousands except per share data) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total Equity | 176,773 | 150,192 | 145,624 | | Less: Preferred equity | (7,834) | (7,834) | (16,334) | | Less: Total intangibles | (19,030) | (19,126) | (19,224) | | Tangible common equity | 149,909 | 123,232 | 110,066 | | Common shares outstanding | 11,607,293 | 10,444,627 | 9,996,544 | | Tangible book value per common share | $12.92 | $11.80 | $11.01 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, net income increased to $12.0 million, driven by higher net interest income from loan growth, partially offset by reduced noninterest income and increased expenses, while assets grew to $1.8 billion Results of Operations Net income from continuing operations increased to $12.0 million in 2018, driven by a 17.5% rise in net interest income, despite declines in mortgage fee income and increased noninterest expenses Key Performance Indicators (Continuing Operations) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $12.0 million | $7.6 million | | Return on Average Assets (ROA) | 0.73% | 0.52% | | Return on Average Equity (ROE) | 7.46% | 5.23% | | Basic Earnings Per Share (EPS) | $1.04 | $0.69 | | Diluted Earnings Per Share (EPS) | $1.00 | $0.68 | - Net interest income increased by $7.8 million (17.5%) in 2018, driven by growth in average earning assets, particularly commercial loans[230] - Noninterest income decreased by $2.1 million in 2018, primarily due to a $4.8 million decline in mortgage fee income as mortgage production volume fell by 6.1%[245] - Noninterest expense increased by $2.4 million in 2018, with salaries and benefits rising by $2.1 million due to additional staffing for organic growth[252] - The effective tax rate dropped to 22% in 2018 from 39% in 2017, mainly due to the reduction of the federal corporate income tax rate from the Tax Reform Act[259] Financial Condition Total assets grew by $216.7 million to $1.8 billion in 2018, primarily due to a $198.4 million increase in net loans, funded by deposit growth and borrowings, while capital ratios remained strong Balance Sheet Highlights (Year-End) | (Dollars in millions) | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,751.0 | $1,534.3 | +$216.7 | | Net Loans | $1,293.4 | $1,096.1 | +$197.3 | | Total Deposits | $1,309.2 | $1,159.6 | +$149.6 | | Borrowings | $214.9 | $152.2 | +$62.7 | | Stockholders' Equity | $176.8 | $150.2 | +$26.6 | - Loan growth of $198.4 million in 2018 was driven by a $157.1 million increase in commercial and non-residential real estate loans and a $45.3 million increase in residential real estate loans[268] - In 2018, $16.0 million of subordinated debt was converted into 1,000,000 shares of common stock, which will save an estimated $1.1 million in annual interest expense[288][464] Regulatory Capital Ratios (Consolidated) | Ratio | Dec 31, 2018 | Well Capitalized Standard | | :--- | :--- | :--- | | Total risk-based capital | 13.8% | 10.0% | | Tier 1 risk-based capital | 12.0% | 8.0% | | Common equity tier 1 capital | 11.2% | 6.5% | | Leverage ratio | 9.9% | 5.0% | Liquidity and Interest Rate Sensitivity The company manages liquidity primarily through deposit growth and FHLB access, while interest rate risk analysis shows short-term liability sensitivity, with all measures within policy limits - The company's primary liquidity source is deposit growth, with additional sources including investment maturities, loan payments, and access to FHLB advances[315] Estimated Change in Net Interest Income (NII) over 12 Months | Change in Interest Rates | % Change in NII (Dec 31, 2018) | Policy Limit | | :--- | :--- | :--- | | +200 bp | (0.7)% | 15.0% | | +100 bp | (0.7)% | 10.0% | | -100 bp | (2.9)% | 10.0% | | -200 bp | (8.2)% | 15.0% | Estimated Change in Economic Value of Equity (EVE) | Change in Interest Rates | % Change in EVE (Dec 31, 2018) | Policy Limit | | :--- | :--- | :--- | | +200 bp | (4.3)% | 17.0% | | +100 bp | (2.0)% | 12.0% | | -100 bp | (2.7)% | 12.0% | | -200 bp | (11.9)% | 17.0% | Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2018, comprising balance sheets, income statements, cash flows, and detailed notes on accounting policies and financial disclosures Consolidated Financial Statements The consolidated financial statements show total assets of $1.75 billion, net income of $12.0 million for 2018, and detailed cash flow activities Consolidated Balance Sheet Summary (December 31, 2018) | (Dollars in thousands) | Amount | | :--- | :--- | | Assets | | | Net Loans | $1,293,427 | | Investment Securities | $231,213 | | Total Assets | $1,750,969 | | Liabilities & Equity | | | Total Deposits | $1,309,154 | | Total Liabilities | $1,574,196 | | Total Stockholders' Equity | $176,773 | | Total Liabilities & Stockholders' Equity | $1,750,969 | Consolidated Income Statement Summary (Year Ended Dec 31, 2018) | (Dollars in thousands) | Amount | | :--- | :--- | | Net Interest Income | $52,054 | | Provision for loan losses | $2,440 | | Noninterest Income | $38,640 | | Noninterest Expense | $72,878 | | Net Income | $12,003 | Notes to Consolidated Financial Statements The notes detail accounting policies, including the $10.9 million allowance for loan losses, investment portfolio composition, capital ratios, and segment performance, with Commercial & Retail Banking as the primary income driver - The allowance for loan losses is determined based on historical experience, the nature of the loan portfolio, and prevailing economic conditions, using specific allowances for impaired loans and general components for non-impaired loans[361][362] - Impaired loans decreased to $12.8 million at year-end 2018 from $15.6 million in 2017. The allowance for loan losses allocated to these impaired loans was $1.0 million[279][414] Segment Net Income (Loss) - 2018 | (Dollars in thousands) | Net Income (Loss) | | :--- | :--- | | Commercial & Retail Banking | $15,503 | | Mortgage Banking | $1,953 | | Holding Company | ($5,453) | | Consolidated Net Income | $12,003 | Controls and Procedures Management confirmed effective disclosure controls and internal control over financial reporting as of December 31, 2018, with the independent auditor issuing an unqualified opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[589] - Based on an assessment using the COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2018, with no material weaknesses identified[594][595] - The independent auditor, Dixon Hughes Goodman LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018[601] Part III Directors, Executive Compensation, Security Ownership, and Principal Accounting Fees Information for Items 10-14, covering directors, executive compensation, security ownership, and accounting fees, is incorporated by reference from the 2019 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement to be filed for the 2019 Annual Meeting of Shareholders[611][612][615][616] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, including the independent auditor's report and various corporate governance documents - This section lists all financial statements and exhibits filed with the Form 10-K, including the independent auditor's report, consolidated financial statements, and various corporate governance and contractual documents[618][619]