mvbf_Current folio_10K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               To               

 

Commission file Number 34603-9

 

MVB Financial Corp.

(Exact name of registrant as specified in its charter)

 

 

 

 

West Virginia

 

20-0034461

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

301 Virginia Avenue, Fairmont, WV

 

26554

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number (304) 363-4800

 

(Former name, former address and former fiscal year, if changed since last report)[None]

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

 

Name of each exchange on
which registered

Common Stock, $1.00 Par

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $1.00 Par

(Title of Class)

 

Preferred Stock $1,000.00 Par

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No .

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act.  Yes  No 

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-KYes  No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No .  

 

Based upon the average selling price of sales known to the Registrant of the common shares of the Registrant during the period through June 30, 2014, the aggregate market value of the common shares of the Registrant held by non affiliates during that time was $105,974,912.  For this purpose certain executive officers and directors are considered affiliates..

 

Portions of the registrant’s definitive proxy statement relating to the Annual Meeting to be held May 19,  2015, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

As of March 16,  2015, the Registrant had 7,983,285 shares of common stock outstanding with a par value of $1.

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

    

    

    

Page

 

 

 

 

 

 

 

PART I 

 

 

 

 

 

 

 

 

 

 

 

Item 1. 

 

Business

 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

12 

 

 

 

 

 

 

 

Item 1B. 

 

Unresolved Staff Comments

 

12 

 

 

 

 

 

 

 

Item 2. 

 

Properties

 

12 

 

 

 

 

 

 

 

Item 3. 

 

Legal Proceedings

 

13 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosure

 

13 

 

 

 

 

 

 

 

PART II 

 

 

 

 

 

 

 

 

 

 

 

Item 5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities

 

13 

 

 

 

 

 

 

 

Item 6. 

 

Selected Financial Data

 

14 

 

 

 

 

 

 

 

Item 7. 

 

Management’s discussion and analysis of financial condition and results of operations

 

14 

 

 

 

 

 

 

 

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

34 

 

 

 

 

 

 

 

Item 8. 

 

Financial Statements and Supplementary Data

 

35 

 

 

 

 

 

 

 

Item 9. 

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

87 

 

 

 

 

 

 

 

Item 9A. 

 

Controls and Procedures

 

87 

 

 

 

 

 

 

 

Item 9B. 

 

Other Information

 

90 

 

 

 

 

 

 

 

PART III 

 

 

 

 

 

 

 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

90 

 

 

 

 

 

 

 

Item 11. 

 

Executive Compensation

 

90 

 

 

 

 

 

 

 

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

90 

 

 

 

 

 

 

 

Item 13. 

 

Certain Relationships and Related transactions, and Director Independence

 

90 

 

 

 

 

 

 

 

Item 14. 

 

Principal Accountant Fees and Services

 

90 

 

 

 

 

 

 

 

Part IV 

 

 

 

 

 

 

 

 

 

 

 

Item 15. 

 

Exhibits and Financial Statement Schedules

 

91 

 

 

 

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Table of Contents

PART I

 

ITEM 1.BUSINESS

 

MVB Financial Corp. (“the Company”) was formed on January 1, 2004, as a bank holding company and, effective December 19, 2012, became a financial holding company.  The Company features multiple subsidiaries and affiliated businesses, including MVB Bank, Inc. (the “Bank” or “MVB Bank”) and its wholly-owned subsidiary MVB Mortgage and MVB Insurance, LLC (“MVB Insurance”). On December 31, 2013, three Company subsidiaries, MVB-Central, Inc. (a second-tier level holding company), MVB-East, Inc. (a second tier holding company) and Bank Compliance Solutions, Inc. (an inactive subsidiary) were merged into the Company.

 

The Bank was formed on October 30, 1997 and chartered under the laws of the State of West Virginia.  The Bank commenced operations on January 4, 1999. In August of 2005, the Bank opened a full service office in neighboring Harrison County, West Virginia.  During October of 2005, the Bank purchased a branch office in Jefferson County, West Virginia, situated in West Virginia’s eastern panhandle.  During the third quarter of 2007, the Bank opened a full service office in the Martinsburg area of Berkeley County, West Virginia.  In the second quarter of 2011, the Bank opened a banking facility in the Cheat Lake area of Monongalia County, West Virginia.  The Bank opened its second Harrison County, West Virginia location, the downtown Clarksburg office in the historic Empire Building during the fourth quarter of 2012. 

 

Also during the fourth quarter of 2012, the Bank acquired Potomac Mortgage Group, Inc. (“PMG” which, following July 15, 2013, began doing business under the registered trade name “MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services company, Lender Service Provider, LLC (“LSP”).  In the third quarter of 2013, this fifty percent (50%) interest in LSP was reduced to a twenty-five percent (25%) interest through a sale of a partial interest.  This PMG acquisition provided the Company and the Bank the opportunity to make the mortgage banking operation a much more significant line of business to further diversify its net income stream.   MVB Mortgage has eleven mortgage only offices, located in Virginia, within the Washington, District of Columbia / Baltimore, Maryland metropolitan area as well as North Carolina and South Carolina, and, in addition, has mortgage loan originators located at select Bank locations throughout West Virginia.

 

In the first quarter of 2013, the Bank opened its second Monongalia County location in the Sabraton area of Morgantown, West Virginia.  In the second quarter of 2013, the Bank opened its second full service office in Berkeley County, West Virginia, at Edwin Miller Boulevard. In addition, the Bank opened a loan production office at 184 Summers Street, Charleston, Kanawha County, West Virginia, which was subsequently moved to 400 Washington Street East, Charleston, West Virginia and later replaced during March 2015 by a full service branch at the same location. During the first quarter of 2014, the Company continued to focus on growth in the Harrison, Berkeley, Jefferson and Monongalia County areas, as well as the Kanawha county area, as the primary method for reaching performance goals. In addition, the Bank opened a loan production office in Reston, Fairfax County, Virginia, from which the Bank operates as MVB Commercial Lending Company. The Company continuously reviews key performance indicators to measure our success.

 

Currently, the Bank operates eleven full-service banking branches in West Virginia, which are located at:  301 Virginia Avenue in Fairmont, Marion County; 9789 Mall Loop (inside the Shop N Save Supermarket) in White Hall, Marion County; 1000 Johnson Avenue in Bridgeport, Harrison County; 406 West Main St. in Clarksburg, Harrison County; 88 Somerset Boulevard in Charles Town, Jefferson County; 651 Foxcroft Avenue in Martinsburg, Berkeley County; 2400 Cranberry Square in Cheat Lake, Monongalia County; 10  Sterling  Drive in Morgantown, Monongalia County; and 231 Aikens Center in Martinsburg, Berkeley County.  During February 2015, the Bank opened a location at 100 NASA Boulevard, Fairmont, Marion County, West Virginia, which will ultimately replace the 9789 Mall Loop, White Hall, Marion County, West Virginia location as the Technology Park location offers a drive-thru facility to better serve customers. During March 2015, the location at 9789 Mall Loop will be closed.  Additionally during March 2015, the Bank opened a new full service location at 400 Washington Street East, Charleston, Kanawha County, West Virginia, replacing its loan production office at the same address. In addition, as noted, the Bank operates a loan production office as MVB Commercial Lending Company, at 1801 Reston Parkway, Suite 103, Reston, Fairfax County, Virginia.

 

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In addition to MVB Mortgage, the Company has a wholly-owned subsidiary, MVB Insurance, LLC.  MVB Insurance was originally formed in 2000 and reinstated in 2005, as a Bank subsidiary.  Effective June 1, 2013, MVB Insurance became a direct subsidiary of the Company.  MVB Insurance offers select insurance products such as title insurance, individual insurance, commercial insurance, employee benefits insurance, and professional liability insurance.  MVB Insurance maintains its headquarters at 301 Virginia Avenue, Fairmont, West Virginia,   and operates offices at: 48 Donley Street, Suite 703, Morgantown, West Virginia, 400 Washington Street East, Charleston, West Virginia,; and 355 Wharton Circle, Suite 123, Triadelphia, West Virginia.

 

At December 31, 2014, the Company had total assets of $1,110.5 million, total loans of $798.3  million, total deposits of $823.2 million and total stockholders’ equity of $109.4 million.

 

The Company’s primary business activities, through its Subsidiaries, are currently community banking, mortgage banking, insurance services, and wealth management.  As a community banking entity, the Bank offers its customers a full range of products through various delivery channels.  Such products and services include checking accounts, NOW accounts, money market and savings accounts, time certificates of deposit, commercial, installment, commercial real estate and residential real estate mortgage loans, debit cards, and safe deposit rental facilities.  Services are provided through our walk-in offices, automated teller machines (“ATMs”), drive-in facilities, and internet and telephone banking. Additionally, the Bank offers non-deposit investment products through an association with a broker-dealer.  Since the opening date of January 4, 1999, the Bank, has experienced significant growth in assets, loans, and deposits due to overwhelming community and customer support in the Marion County, West Virginia and Harrison County, West Virginia markets, expansion into West Virginia’s eastern panhandle counties and, most recently, into Monongalia County, West Virginia.  With the acquisition of PMG, mortgage banking is now a much more significant focus, which has opened up increased market opportunities in the Washington, District of Columbia metropolitan region and added enough volume to better diversify the Company’s earnings stream.

 

At December 31, 2014, the Company had 324 full-time equivalent employees. The Company’s principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800. The Company’s Internet web site is www.mvbbanking.com.

 

Segment Reporting

 

Beginning in 2013, the Company began to operate in a decentralized fashion in three principal business activities: commercial and retail banking services; mortgage banking services; and insurance services. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts.

 

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by MVB Mortgage.

Revenue from insurance services is comprised mainly of commissions on the sale of insurance products.

 

 

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Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended December 31, 2014 and 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

&

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

Mortgage

 

 

 

 

Intercompany

 

 

 

 

(in thousands)

 

Banking

 

Banking

 

Insurance

 

Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

32,258 

 

$

2,891 

 

$

 —

 

$

1,265 

 

$

36,414 

 

Gain on loans held for sale

 

 

900 

 

 

18,691 

 

 

 —

 

 

(1,199)

 

 

18,392 

 

Insurance income

 

 

 —

 

 

 —

 

 

3,523 

 

 

 —

 

 

3,523 

 

Other income

 

 

4,930 

 

 

325 

 

 

 —

 

 

(1,239)

 

 

4,016 

 

Total operating income

 

 

38,088 

 

 

21,907 

 

 

3,523 

 

 

(1,173)

 

 

62,345 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

7,366 

 

 

1,635 

 

 

 —

 

 

(918)

 

 

8,083 

 

Salaries and employee benefits

 

 

13,287 

 

 

14,487 

 

 

3,417 

 

 

 —

 

 

31,191 

 

Provision for loan losses

 

 

2,582 

 

 

 —

 

 

 —

 

 

 —

 

 

2,582 

 

Other expense

 

 

12,094 

 

 

5,640 

 

 

1,027 

 

 

(255)

 

 

18,506 

 

Total operating expenses

 

 

35,329 

 

 

21,762 

 

 

4,444 

 

 

(1,173)

 

 

60,362 

 

Income (loss) before income taxes

 

 

2,759 

 

 

145 

 

 

(921)

 

 

 —

 

 

1,983 

 

Income tax expense (benefit)

 

 

208 

 

 

40 

 

 

(344)

 

 

 —

 

 

(96)

 

Net income (loss)

 

 

2,551 

 

 

105 

 

 

(577)

 

 

 —

 

 

2,079 

 

Preferred stock dividends

 

 

332 

 

 

 —

 

 

 —

 

 

 —

 

 

332 

 

Net income (loss) available to common shareholders

 

$

2,219 

 

$

105 

 

$

(577)

 

$

 —

 

$

1,747 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for the year ended December 31, 2014

 

$

9,112 

 

$

333 

 

$

353 

 

$

 —

 

$

9,798 

 

Total assets as of December 31, 2014

 

 

1,189,746 

 

 

101,791 

 

 

4,031 

 

 

(185,109)

 

 

1,110,459 

 

Goodwill as of December 31, 2014

 

 

897 

 

 

16,882 

 

 

 —

 

 

 —

 

 

17,779 

 

 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

&

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

Mortgage

 

 

 

 

Intercompany

 

 

 

 

(in thousands)

 

Banking

 

Banking

 

Insurance

 

Eliminations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

25,088 

 

$

2,103 

 

$

 —

 

$

(231)

 

$

26,960 

 

Gain on loans held for sale

 

 

2,853 

 

 

19,042 

 

 

 —

 

 

(415)

 

 

21,480 

 

Insurance income

 

 

 —

 

 

 —

 

 

1,722 

 

 

 —

 

 

1,722 

 

Other income

 

 

3,843 

 

 

1,400 

 

 

 —

 

 

 —

 

 

5,243 

 

Total operating income

 

 

31,784 

 

 

22,545 

 

 

1,722 

 

 

(646)

 

 

55,405 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

5,014 

 

 

1,181 

 

 

 —

 

 

(646)

 

 

5,549 

 

Salaries and employee benefits

 

 

12,441 

 

 

13,017 

 

 

1,609 

 

 

 —

 

 

27,067 

 

Provision for loan losses

 

 

2,260 

 

 

 —

 

 

 —

 

 

 —

 

 

2,260 

 

Other expense

 

 

9,811 

 

 

5,081 

 

 

634 

 

 

 —

 

 

15,526 

 

Total operating expenses

 

 

29,526 

 

 

19,279 

 

 

2,243 

 

 

(646)

 

 

50,402 

 

Income (loss) before income taxes

 

 

2,258 

 

 

3,266 

 

 

(521)

 

 

 —

 

 

5,003 

 

Income tax expense (benefit)

 

 

 

 

1,240 

 

 

(262)

 

 

 —

 

 

983 

 

Net income (loss)

 

 

2,253 

 

 

2,026 

 

 

(259)

 

 

 —

 

 

4,020 

 

Preferred stock dividends

 

 

85 

 

 

 —

 

 

 —

 

 

 —

 

 

85 

 

Net income (loss) available to common shareholders

 

$

2,168 

 

$

2,026 

 

$

(259)

 

$

 —

 

$

3,935 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for the year ended December 31, 2013

 

$

5,613 

 

$

489 

 

$

399 

 

$

 —

 

$

6,501 

 

Total assets as of December 31, 2013

 

 

1,021,097 

 

 

92,290 

 

 

3,012 

 

 

(129,339)

 

 

987,060 

 

Goodwill as of December 31, 2013

 

 

897 

 

 

16,882 

 

 

 —

 

 

 —

 

 

17,779 

 

 

 

 

Commercial & Retail Banking

 

For the year ended December 31, 2014, the Commercial & Retail Banking segment earned $2.2 million compared to $2.2 million in 2013. Net interest income increased by $4.8 million, mostly the result of average loan balances increasing by $219.7 million. Noninterest income decreased by $866, largely the result of decreased income from portfolio loans held for sale of $1.9 million. This was the result of integrating the mortgage company in mid-2013, as the bank mortgage volume was transferred to the mortgage company. Noninterest expense increased by $3.1 million, mainly the result of the following: $846 increase in salaries expense, $733 increase in occupancy and equipment expense, $340 increase in data processing expense, $330 increase in FDIC expense, $274 increase in consulting expense and $230 increase in legal expense. Loan loss provision also increased by $322 as a result of loan growth.

 

 

Mortgage Banking

 

For the year ended December 31, 2014, the Mortgage Banking segment earned $105 compared to earning $2.0 million in 2013. Net interest income increased $334, noninterest income decreased by $1.4 million and noninterest expense increased by $2.0 million. The $1.8 million earnings decrease is mainly due to a 17.1% decrease in origination volume, an increase in personnel expense of $1.5 million due to the addition of seven additional offices and employees to expand

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the base of operations as the mortgage business becomes more focused on purchase loans and less on the refinance business and the impact of a refinement in accounting estimate of $706 related to interest rate lock commitments.

 

Insurance

 

For the year ended December 31, 2014, the Insurance segment lost $577 compared to $259 in 2013. Noninterest income increased by $1.8 million and noninterest expense increased by $2.2 million.  Income tax benefit for 2014 increased by $82.

 

Market Area

 

The Company’s primary market areas are the Marion, Harrison, Jefferson, Berkeley, Monongalia, and Kanawha counties of West Virginia, as well as the northern Virginia area for the mortgage and commercial lending business.  Its extended market is in the adjacent counties.

 

United States Census Bureau data indicates that the Fairmont and Marion County, West Virginia populations have had somewhat different trends from 1980 to 2010.  The population of Fairmont has fluctuated from 23,863 in 1980; 20,210 in 1990; 19,097 in 2000 and 18,704 in 2010, or a net decline of 5,159 or 21.6%.  Marion County increased its population from 1980 to 1990, 55,789 to 57,249, decreased to 56,598 in 2000 and decreased to 56,418 in 2010.  These changes resulted in a net increase of 1.1%.  The Marion County population includes that of Fairmont.  The result is that over the last 30 years, there has not been any significant change in population.  Harrison County’s population decreased from 69,371 in 1990 to 68,652 in 2000, increased to 69,099 in 2010 while Bridgeport’s population has increased from 7,306 in 2000 to 7,896 in 2010, indicating that while population change in Harrison County has been relatively flat, the Bridgeport area is growing.  The population in Jefferson County has been on the rise in recent years, increasing from 42,190 in 2000 to 53,498 in 2010.  During this period, Charles Town has seen an increase in population of 80.9% to 5,259 in 2010.  Berkeley County’s population has grown from 75,905 in 2000 to 104,169 in 2010, making it the second-most populous county in West Virginia.  Martinsburg’s population has increased 15.1% since 2000 to 17,227 in 2010.  Monongalia County’s population has increased from 81,866 in 2000 to 96,189 in 2010, an increase of 17.5%.  Morgantown’s population in 2010 was 29,660, an increase of 2,851 or 10.6% since 2000.  Kanawha County’s population decreased slightly from 200,073 in 2000 to 193,063 in 2010, a decrease of 3.5%.  Charleston’s population in 2010 was 51,400, a decrease of 2,021 or 3.93% since 2000.  Based upon this data, the company’s offices are in some of the most desirable locations in the state of West Virginia. 

 

The current economic climate in West Virginia, and, in particular, in the six counties in which the Company and the Bank focuses possess better economic climates than the general national climate.  Unemployment in the United States was 5.4% and 6.5% in December 2014 and 2013, respectively.  The unemployment levels in the six West Virginia counties where MVB operates in were as follows for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

    

December 2014

    

December   2013

 

 

Berkeley County

 

4.9 

%  

4.7 

%  

 

Harrison County

 

4.3 

%  

4.5 

%  

 

Jefferson County

 

3.7 

%  

4.1 

%  

 

Marion County

 

4.6 

%  

4.8 

%  

 

Monongalia County

 

3.1 

%  

3.4 

%  

 

Kanawha County

 

4.9 

%  

5.0 

%  

 

 

 

 

 

The numbers from all six counties continue to be significantly better than the national numbers. The Company and the Bank nonperforming loan information supports the fact that the West Virginia economy has not suffered as much as that

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of the nation as a whole.  Nonperforming loans to total loans were 1.16% in December of 2014 versus 0.14% in December of 2013 and charge offs to total loans were 0.16% and 0.25% for each period respectively. The Company and the Bank continue to closely monitor economic and delinquency trends.

 

The Company originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, the Company retains most of its originated loans (exclusive of certain long-term, fixed rate residential mortgages that are sold.)  However, loans originated in excess of the Bank’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by the bank. The Company has no loans to foreign entities. The Company’s lending market area is primarily concentrated in the Marion, Harrison, Berkeley, Jefferson, Kanawha and Monongalia Counties of West Virginia, as well as the northern Virginia area for mortgage and commercial lending.

 

Commercial Loans

 

At December 31, 2014, the Bank had outstanding approximately $560.8 million in commercial loans, including commercial, commercial real estate, financial and agricultural loans.  These loans represented approximately 70.3% of the total aggregate loan portfolio as of that date.

 

Lending Practices. Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family residential mortgage lending, and installment lending). In addition, the payment experience on commercial loans typically depends on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the general economy or in a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment and the risk involved. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, the Bank reviews collateral to determine its value in relation to the loan in the event of a foreclosure.

 

The Bank evaluates all new commercial loans, as well as customers that have total outstanding loans that aggregate more than $1,000.  If deterioration in credit worthiness has occurred, the Bank takes effective and prompt action designed to assure repayment of the loan. Upon detection of the reduced ability of a borrower to meet original cash flow obligations, the loan is considered a classified loan and reviewed for possible downgrading or placement on non-accrual status.

 

Consumer Loans

 

At December 31, 2014, the Bank had outstanding consumer loans in an aggregate amount of approximately $17.1 million or approximately 2.1% of the aggregate total loan portfolio.

 

Lending Practices. Consumer loans generally involve more risk as to collectability than mortgage loans because of the type and nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower’s continued financial stability, and thus are more likely to be adversely affected by employment loss, personal bankruptcy, or adverse economic conditions. Credit approval for consumer loans requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of the Bank to review its consumer loan portfolio monthly and to charge off loans that do not meet its standards and to adhere strictly to all laws and regulations governing consumer lending.

 

Real Estate Loans

 

At December 31, 2014, the Bank had approximately $220.4 million of residential real estate loans, home equity lines of credit, and construction mortgages outstanding, representing 27.6% of total loans outstanding.

 

Lending Practices. The Bank generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, unless the borrower obtains private mortgage insurance for the percentage exceeding 80%. Occasionally, the Bank may lend up to 100% of the appraised value of the

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real estate.  Loans made in this lending category are generally one to ten year adjustable rate, fully amortizing to maturity mortgages. MVB Bank also originates fixed rate real estate loans and generally sells these loans in the secondary market. Most real estate loans are secured by first mortgages with evidence of title in favor of the Bank in the form of an attorney’s opinion of the title or a title insurance policy. MVB Bank also requires proof of hazard insurance with the Bank named as the mortgagee and as the loss payee. Full appraisals are obtained from licensed appraisers for the majority of loans secured by real estate.

 

Home Equity Loans. Home equity lines of credit are generally made as second mortgages by MVB Bank. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. The Bank will lend up to 100% of the appraised value of the property at higher interest rates which are considered compatible with the additional risk assumed in these types of loans. The home equity lines of credit are written with 10 year terms, but are subject to review upon request for renewal.

 

Construction Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, MVB may advance funds beyond the amount originally committed to permit completion of the project.

 

Competition

 

The Company experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location and overall financial condition. The Company believes that its community approach provides flexibility, which enables the bank to offer an array of banking products and services.

 

The Company primarily focuses on the Marion, Harrison, Jefferson, Berkeley, Monongalia and Kanawha County markets in West Virginia and the northern Virginia area for its products and services. Management believes it has developed a niche and a level of expertise in serving this area.

 

The Company operates under a “needs-based” selling approach that management believes has proven successful in serving the financial needs of most customers. It is not the Company’s strategy to compete solely on the basis of interest rates. Management believes that a focus on customer relationships and service will promote our customers’ continued use of our financial products and services and will lead to enhanced revenue opportunities.

 

Supervision and Regulation

 

The following is a summary of certain statutes and regulations affecting the Company and its subsidiaries and is qualified in its entirety by reference to such statutes and regulations:

 

Financial Holding Company Regulation — MVB Financial Corp. is a financial holding company under the Bank Holding Company Act of 1956, as amended, or BHCA, and is subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. In general, the BHCA limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto.  Under the BHCA, bank holding companies that qualify and elect to be financial holding companies, such as MVB Financial Corp., may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either(i)financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Office of the Comptroller of the Currency) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board).  MVB Financial

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Corp.’s subsidiary bank, MVB Bank, Inc., is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates. The Company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by MVB Financial Corp. or its subsidiaries.

 

On July 30, 2002, the Senate and the House of Representatives of the United States (Congress) enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.  The New York Stock Exchange proposed corporate governance rules that were enacted by the Securities and Exchange Commission.  The changes are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors and should not significantly impact the Company.

 

Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, MVB Financial Corp.’s chief executive officer and chief financial officer are each required to certify that the company’s Quarterly and Annual Reports do not contain any untrue statement of a material fact.  The rules have several requirements, including having these officers certify that:  they are responsible for establishing, maintaining and regularly evaluating the effectiveness of MVB Financial Corp.’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the company’s internal controls; and they have included information in MVB Financial Corp.’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

 

The Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) permits bank holding companies to become financial holding companies.  This allows them to affiliate with securities firms and insurance companies and to engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

 

The Financial Services Modernization Act defines “financial in nature” to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating.

 

Banking Subsidiary Regulation. MVB Bank, Inc. was chartered as a state bank and is regulated by the West Virginia Division of Financial Institutions and the Federal Deposit Insurance Corporation. The Bank provides FDIC insurance on its deposits and is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”).

 

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot Act)

 

The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “Patriot Act”) was adopted in response to the September 11, 2001 terrorist attacks.  The Patriot Act provides law enforcement with greater powers to investigate terrorism and prevent future terrorist acts.  Among the broad-reaching provisions contained in the Patriot Act are several designed to deter terrorists’ ability to launder money in the United States and provide law enforcement with additional powers to investigate how terrorists and terrorist organizations are financed.  The Patriot Act creates additional requirements for banks, which were already subject to similar regulations.  The Patriot Act authorizes the Secretary of the Treasury to require financial institutions to take certain “special measures” when the Secretary suspects that certain transactions or accounts are related to money laundering.  These special measures may be ordered when the Secretary suspects that a jurisdiction outside of the United States, a financial institution operating outside of the United States, a class of transactions involving a jurisdiction outside of the United States or certain types

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of accounts are of “primary money laundering concern.”  The special measures include the following: (a) require financial institutions to keep records and report on the transactions or accounts at issue; (b) require financial institutions to obtain and retain information related to the beneficial ownership of any account opened or maintained by foreign persons; (c)require financial institutions to identify each customer who is permitted to use a payable-through or correspondent account and obtain certain information from each customer permitted to use the account; and (d) prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts.

 

Federal Deposit Insurance Corporation

 

The FDIC insures the deposits of the Bank which is subject to the applicable provisions of the Federal Deposit Insurance Act. The FDIC may terminate a bank’s deposit insurance upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank’s regulatory agency.

 

Federal Home Loan Bank

 

The FHLB provides credit to its members in the form of advances. As a member of the FHLB of Pittsburgh, the Bank must maintain an investment in the capital stock of that FHLB in an amount equal to 0.35% of the calculated Member Asset Value (MAV) plus 4.60% of outstanding advances.  The MAV is determined by taking line item values for various investment and loan classes and applying an FHLB haircut to each item.

 

Capital Requirements

 

Federal Reserve Board. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. For further discussion regarding the Bank’s risk-based capital requirements, see Note 14 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

West Virginia Division of Financial Institutions. State banks, such as MVB Bank, Inc. are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.

 

Limits on Dividends

 

The Company’s ability to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends the Company declares. However, the Federal Reserve Board expects MVB Financial Corp. to serve as a source of strength to the Bank. The Federal Reserve Board may require the Company to retain capital for further investment in the Bank, rather than pay dividends to its shareholders. MVB Bank, Inc. may not pay dividends to MVB if, after paying those dividends, the Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The Bank must have the approval from the West Virginia Division of Financial Institutions if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net earnings as defined and the retained earnings for the preceding two years as defined, less required transfers to surplus. These provisions could limit the Company’s ability to pay dividends on its outstanding common shares.

 

Federal and State Consumer Laws

 

MVB Bank, Inc. is subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of a bank to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent a bank lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

 

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Monetary Policy and Economic Conditions

 

The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and the interest rates charged on loans, as well as the interest rates paid on deposit accounts.

 

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets and the activities of monetary and fiscal authorities, the Company cannot predict future changes in interest rates, credit availability or deposit levels.

 

Effect of Environmental Regulation

 

The Company’s primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, the Company mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

 

With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit.

 

The Company anticipates no material effect on anticipated capital expenditures, earnings or competitive position as a result of compliance with federal, state or local environmental protection laws or regulations.

 

ITEM 1A.RISK FACTORS

 

No response required.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

No response required.

 

ITEM 2.PROPERTIES

 

The Company, through its Bank subsidiary, owns its main office located at 301 Virginia Avenue in Fairmont, West Virginia, along with its offices at 1000 Johnson Avenue in Bridgeport, West Virginia; 88 Somerset Boulevard in Charles Town, West Virginia; 651 Foxcroft Avenue in Martinsburg, West Virginia; 10 Sterling Drive in Morgantown, West Virginia; 100 NASA Boulevard in Fairmont, West Virginia; and 400 Washington Street East in Charleston, West Virginia..

 

The Company, through its Bank subsidiary, leases its office at 9789 Mall Loop inside the Shop N Save supermarket in White Hall, West Virginia;, the 2400 Cranberry Square office in Morgantown, West Virginia; the 406 West Main Street office in Clarksburg, West Virginia; the operations center space in Bridgeport, West Virginia; and the 231 Aikens Center office in Martinsburg, West Virginia.  The Company, through its MVB Insurance subsidiary, leases the 300 Wharton Circle office space in Triadelphia, West Virginia; and the 48 Donley Street office space in Morgantown, West Virginia.  The Company also leases additional space at 48 Donley Street in Morgantown, West Virginia.  Office space is also leased at the following locations by the Company’s MVB Mortgage subsidiary: 4035 Ridgetop Road in Fairfax, Virginia;, 20130 Lakeview Center Plaza in Ashburn, Virginia;, 11325 Random Hills Road in Fairfax, Virginia; 1311-A

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Dolley Madison Boulevard in McLean, Virginia; 1206 Laskin Road in Virginia Beach, Virginia;, 1400 K Street NW in Washington, District of Columbia; 824 Meeting Street in West Columbia, South Carolina; 2508 Raeford Road in Fayetteville, North Carolina; 706 Green Valley Road in Greensboro, North Carolina; 4020 Wake Forest Road in Raleigh, North Carolina; 2011-1 Elk Road SW in Supply, North Carolina; and 1838 Sir Tyler Drive in Wilmington, North Carolina.

 

Additional information concerning the property and equipment owned or leased by the Company and its subsidiaries is incorporated herein by reference from “Note 4, Premises and Equipment” and “Note 16, Leases” of the Notes to the Financial Statements included in Item 8 of this Form 10-K.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time in the ordinary course of business, the Company and its subsidiaries are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations.  Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations.  Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings, the results are difficult to predict at all.  The Company is not aware of any asserted or unasserted legal proceedings or claims that the Company believes would have a material adverse effect on the Company’s financial condition or results of the Company’s operations.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

No response required.

 

PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES

 

MVB Financial Corp.’s common shares are not traded on any national exchange.

 

The table presented below sets forth the estimated market value for the indicated periods based upon sales known to management with respect to the Company’s common shares. The information set forth in the table is based on knowledge of certain arms-length transactions in the stock.  In addition, dividends are subject to the restrictions described in Note 15 to the financial statements.

 

Quarterly Market and Dividend Information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

 

    

Estimated

    

    

 

    

Estimated

    

    

 

 

 

 

Market Value

 

 

 

 

Market Value

 

 

 

 

 

 

Per Share

 

Dividend

 

Per Share

 

Dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

14.99 

 

$

0.04 

 

$

16.60 

 

$

0.04 

 

Third Quarter

 

 

15.70 

 

 

 —

 

 

19.25 

 

 

 —

 

Second Quarter

 

 

16.00 

 

 

0.04 

 

 

14.13 

 

 

0.035 

 

First Quarter

 

 

16.50 

 

 

 —

 

 

12.25 

 

 

 —

 

 

MVB Financial Corp. had 1,197 stockholders of record at December 31, 2014. The Company began paying an annual dividend of $.05 per share beginning in December 2008 through December 2011.  Beginning in 2012, the Company began paying a semi-annual dividend of $.04 per share in June and December. In 2013 and 2014, MVB Financial Corp. paid a semi-annual dividend of $.04 per share in June and $.04 per share in December. No dividends were paid prior to 2008.

 

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Equity Compensation Plan Information

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

    

Number of securities

 

 

 

 

 

 

 

 

remaining available for

 

 

 

 

 

 

 

 

future issuance under

 

 

 

Number of securities to

 

 

 

 

equity compensation

 

 

 

be issued upon

 

Weighted-average

 

plans (excluding

 

 

 

exercise

 

exercise price of

 

securities reflected in

 

 

 

of outstanding options

 

outstanding options

 

column (a))

 

Plan Category

 

(a)  

 

(b)  

 

(c)  

 

Equity compensation plans approved by security holders

 

543,870 

 

$

9.60 

 

887,895 

 

Equity compensation plans not approved by security holders

 

n/a

 

 

n/a

 

n/a

 

Total

 

543,870 

 

$

9.60 

 

887,895 

 

 

During 2014, 6,400 stock options under the Company’s equity compensation plan were exercised.

 

ITEM 6.SELECTED FINANCIAL DATA

 

No response required.

 

 

 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-looking Statements:

 

Statements in this Annual Report on Form 10-K that are based on other than historical data are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

 

·

statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of MVB  Financial Corp. (the “Company”) and its subsidiaries (collectively “we,” “our,” or “us), including MVB Bank, Inc. (the “Bank”);

 

·

statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” or similar expressions.

 

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the Company’s or the Bank management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in this Management’s Discussion and Analysis section. Factors that might cause such differences include, but are not limited to:

 

·

the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to successfully execute business plans, manage risks, and achieve objectives;

 

·

changes in local, national and international political and economic conditions, including without limitation the political and economic effects of the recent economic crisis, delay of recovery from that crisis, economic conditions and fiscal imbalances in the United States and other countries, potential or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major developments, including wars, military actions, and terrorist attacks;

 

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·

changes in financial market conditions, either internationally, nationally or locally in areas in which the Company, the Bank,  MVB Mortgage, and MVB Insurance conduct operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;

 

·

fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

 

·

the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to successfully conduct acquisitions and integrate acquired businesses;

 

·

potential difficulties in expanding the businesses of the Company, the Bank, MVB Mortgage, and MVB Insurance in existing and new markets;

 

·

increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments;

·

changes in fiscal, monetary, regulatory, trade and tax policies and laws, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, and the FDIC;

 

·

the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact the ability of the Company, the Bank, MVB Mortgage, MVB Insurance, and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;

 

·

the impact of the Dodd-Frank Act and of new international standards known as Basel III, and rules and regulations thereunder, many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which the Company, the Bank, MVB Mortgage, and MVB Insurance engage in such activities, the fees that the Bank, MVB Mortgage, and MVB Insurance may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;

 

·

continuing consolidation in the financial services industry; new legal claims against the Company, the Bank, MVB Mortgage, and MVB Insurance, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;

 

·

success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;

 

·

changes in consumer spending and savings habits;

 

·

increased competitive challenges and expanding product and pricing pressures among financial institutions;

 

·

inflation and deflation;

 

·

technological changes and the implementation of new technologies by the Company, the Bank, MVB Mortgage, and MVB Insurance;

 

·

the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to develop and maintain secure and reliable information technology systems;

 

·

legislation or regulatory changes which adversely affect the operations or business of the Company, the Bank, MVB Mortgage, or MVB Insurance;

 

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·

the ability of the Company, the Bank, MVB Mortgage, and MVB Insurance to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies; and,

 

·

costs of deposit insurance and changes with respect to FDIC insurance coverage levels.

 

Except to the extent required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

 

In Management’s Discussion and Analysis we review and explain the general financial condition and the results of operations for MVB Financial Corp. and its subsidiaries. We have designed this discussion to assist you in understanding the significant changes in the Company’s financial condition and results of operations.  We have used accounting principles generally accepted in the United States to prepare the accompanying consolidated financial statements. We engaged Dixon Hughes Goodman, LLP. to audit the consolidated financial statements and their independent audit report is included herein.

 

Introduction

 

The following discussion and analysis of the Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial results and operations of the Company. You should read this discussion and analysis in conjunction with the audited Consolidated Financial Statements and footnotes and the ratios and statistics contained elsewhere in this Form 10-K.

 

Application of Critical Accounting Policies

 

The Company’s consolidated financial statements are prepared in accordance with U. S. generally accepted accounting principles and follow general practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.

 

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in management’s discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

 

Allowance for Loan Losses

 

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio.  Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires

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significant judgment and the use of estimates related to the amount and timing of losses inherent in classifications of homogeneous loans based on the Bank’s historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change.  Non-homogeneous loans are specifically evaluated due to the increased risks inherent in those loans.  The loan portfolio also represents the largest asset type in the consolidated balance sheet. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Allowance for Loan Losses section of this financial review.

 

Investment Securities

 

Investment securities at the time of purchase are classified as one of the following:

 

Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. The Company had $54.5 million and $56.7 million as of December 31, 2014 and 2013.

 

Available-for-Sale Securities - Includes debt and equity securities not classified as held-to-maturity that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments.  Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated income tax effect.

 

The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.

 

Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. For equity securities where the fair value has been significantly below cost for one year, the Company’s policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the consolidated statement of income.

 

Common stock of the Federal Home Loan Bank represents ownership in an institution which is wholly owned by other financial institutions. These equity securities are accounted for at cost and are classified as other assets.

 

See Note 2 to the consolidated financial statements for the Company’s policy regarding the other than temporary impairment of investment securities.

 

Goodwill and Other Intangible Assets

 

As discussed in Note 1 of the consolidated financial statements, the Company must assess goodwill and other intangible assets each year for impairment.  This assessment involves estimating the fair value of the Company’s reporting units.  If the fair value of the reporting unit is less than its carrying value including goodwill, we would be required to take a charge against earnings to write down the assets to the lower value.

 

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Deferred Tax Assets

 

We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Management also evaluates deferred tax assets to determine if it is more likely than not that the deferred tax benefit will be utilized in future periods.  If not, a valuation allowance is recorded.  Our deferred tax assets are described further in Note 8 of the consolidated financial statements.

 

Recent Accounting Pronouncements and Developments

 

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on MVB Financials Corp’s Consolidated Financial Statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principal of this ASU is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for us in our first quarter of 2018. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of this ASU on our financial statements.

 

In June 2014, the FASB issued ASU 2014-12 – Compensation – Stock Compensation (Topic 718): “Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period,” an update to the accounting standards related to stock compensation and accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized be achieved after the requisite service period. This update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.  Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.

 

In August 2014, the FASB issued ASU No. 2014-14 – Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, to address

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the diversity in practice regarding the classification and measurement of foreclosed loans which were part of a government-sponsored loan guarantee program (e.g. HUD, FHA, VA). The ASU outlines certain criteria that, if met, the loan (residential or commercial) should be derecognized and a separate other receivable should be recorded upon foreclosure at the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. This ASU will be effective for annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. Early adoption is permitted, provided the entity has adopted ASU 2014-04. The ASU should be adopted either prospectively or on a modified retrospective basis. Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.

 

In August 2014, the FASB issued ASU No. 2014-15 - Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” to reduce diversity in the timing and content of going concern disclosures.  This ASU clarifies management’s responsibility to evaluate and provide related disclosures if there are any conditions or events, as a whole, that raise substantial doubt about the entity’s ability to continue as a going concern for one year after the date the financial statements are issued (or, if applicable, available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. Management is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.

 

Summary Financial Results

 

The Company earned $2.1 million in 2014 compared to $4.0 million in 2013, a decrease of $1.9 million. The earnings equated to a 2014 return on average assets of .20% and a return on average equity of 2.01%, compared to prior year results of .51% and 5.11%, respectively.  Basic earnings per share were $0.22 in 2014 compared to $0.59 in 2013.

Diluted earnings per share were $0.22 in 2014 compared to $0.57 in 2013.  

 

Net interest income increased $6.9 million, noninterest income decreased $2.5 million and noninterest expenses increased by $7.1 million. The Bank’s yield on earning assets in 2014 was 3.85% compared to 3.77% in 2013. Despite extensive competition, total loans increased to $798.3 million at December 31, 2014, from $622.3 million at December 31, 2013.  The Bank’s ability to originate quality loans is supported by a minimal delinquency rate.

 

Deposits increased $127.4 million to $823.2 million at December 31, 2014, from $695.8 million at December 31, 2013.  The Bank offers an uncomplicated product design accompanied by a simple fee structure that is attractive to customers. The overall cost of funds for the bank was 0.93% in 2014 compared to 0.85% in 2013. This cost of funds, combined with the earning asset yield, resulted in a net interest margin of 2.99% in 2014 compared to 2.99% in 2013.

 

 

Interest Income and Expense

 

Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities and certificates of deposit in other banks. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as sweep accounts and repurchase agreements. Net interest income remains the primary source of revenue for the Bank. Net interest income is also impacted by changes in market interest rates, as well as the mix of interest-earning assets and interest-bearing liabilities. Net interest income is also impacted favorably by increases in non-interest bearing demand deposits and equity.

 

Net interest margin is calculated by dividing net interest income by average interest-earning assets and serves as a measurement of the net revenue stream generated by the Bank’s balance sheet. As noted above, the net interest margin was 2.99% in 2014 compared to 2.99% in 2013. The net interest margin continues to face considerable pressure due to competitive pricing of loans and deposits in the Bank’s markets.  During 2014, the Federal Reserve did not change rates and in fact committed to keep rates low through mid-2015.  Management’s estimate of the impact of future changes in market interest rates is shown in the section captioned “Interest Rate Risk.”

 

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Company management continues to analyze methods to deploy assets into an earning asset mix which will result in a stronger net interest margin. Loan growth continues to be strong and management anticipates that loan activity will remain strong in the near term future.

 

During 2014, net interest income increased by $6.9 million or 32.3% to $28.3 million from $21.4 million in 2013.  This increase is largely due to the growth in average earning assets, primarily $219.7 million in loans and loans held for sale.  Average total earning assets were $946.5 million in 2014 compared to $715.0 million in 2013. Average total loans and loans held for sale grew to $779.8 million in 2014 from $560.1 million in 2013.  Primarily as a result of this growth, total interest income increased by $9.4 million, or 35.1%, to $36.4 million in 2014 from $27.0 million in 2013. Average investment securities increased $5.1 million, mainly the result of a $10.6 million average increase in municipal investments offset by a $5.5 million decrease in available-for-sale investments. The increased yield on the municipal securities of 13 basis points helped to increase the total investment portfolio yield.  Average interest-bearing liabilities, mainly deposits, likewise increased in 2014 by $210.2 million.  Average interest-bearing deposits grew to $710.4 million in 2014 from $507.7 million in 2013.  Total interest expense increased by $2.5 million, caused by a $1.6 million increase in deposit interest and a $1.1 million increase in subordinated debt interest.  The result was an 8 basis point increase in interest cost from 2013 to 2014.

 

The Company’s earning assets increased $231.4 million and net interest income increased by $6.9 million. The net interest margin continues to be pressured by increased competition for high quality loan growth and the deposit volume required to fund the growth.

 

The Bank’s yield on earning assets changed during 2014 as follows:  The loan portfolio yield decreased by 5 basis points and the investment portfolio yield increased by 13 basis points while funding costs increased by 8 basis points.

 

The cost of interest-bearing liabilities increased to 0.93% in 2014 from 0.85% in 2013. This increase is primarily the result of a 409 basis point increase in the cost of subordinated debt. Further discussion on subordinated debt is included in Note 6 to the consolidated financial statements.

 

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Statistical Financial

Information Regarding MVB Financial Corp.

The following tables provide further information about interest income and expense:

Average Balances and Analysis of Net Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

 

    

 

 

    

Interest

    

    

    

 

 

    

Interest

    

    

 

 

 

    

Interest

    

    

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

(Dollars in thousands)

 

Balance

 

Expense

 

Cost

 

Balance

 

Expense

 

Cost

 

Balance

 

Expense

 

Cost

 

Interest-bearing deposits in banks

 

$

20,123 

 

$

45 

 

0.22 

%  

$

12,530 

 

$

32 

 

0.26 

%  

$

6,695 

 

$

15 

 

0.22 

%

CDs with other banks

 

 

9,826 

 

 

178 

 

1.81 

 

 

9,427 

 

 

168 

 

1.78 

 

 

9,565 

 

 

189 

 

1.98 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

86,868 

 

 

1,272 

 

1.46 

 

 

92,371 

 

 

1,348 

 

1.46 

 

 

91,703 

 

 

1,457 

 

1.59 

 

Tax-exempt

 

 

55,972 

 

 

1,646 

 

2.94 

 

 

45,407 

 

 

1,281 

 

2.82 

 

 

22,466 

 

 

679 

 

3.02 

 

Loans and loans held for sale: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

489,382 

 

 

21,344 

 

4.36 

 

 

317,934 

 

 

14,681 

 

4.62 

 

 

255,641 

 

 

12,511 

 

4.89 

 

Tax exempt

 

 

29,682 

 

 

1,078 

 

3.63 

 

 

24,863 

 

 

959 

 

3.86 

 

 

18,980 

 

 

809 

 

4.26 

 

Real estate

 

 

242,526 

 

 

10,078 

 

4.16 

 

 

198,620 

 

 

7,645 

 

3.85 

 

 

138,034 

 

 

5,770 

 

4.18 

 

Consumer

 

 

18,228 

 

 

773 

 

4.24 

 

 

18,714 

 

 

846 

 

4.52 

 

 

14,812 

 

 

824 

 

5.56 

 

Allowance for loan losses

 

 

(6,135)

 

 

 

 

 

 

 

(4,827)

 

 

 

 

 

 

 

(3,436)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

 

773,683 

 

 

33,273 

 

4.30 

 

 

555,304 

 

 

24,131 

 

4.35 

 

 

424,031 

 

 

19,914 

 

4.70 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earning assets

 

 

946,472 

 

 

36,414 

 

3.85 

 

 

715,039 

 

 

26,960 

 

3.77 

 

 

554,460 

 

 

22,254 

 

4.01 

 

Cash and due from banks

 

 

15,173 

 

 

 

 

 

 

 

18,402 

 

 

 

 

 

 

 

11,163 

 

 

 

 

 

 

Other assets

 

 

75,309 

 

 

 

 

 

 

 

61,854 

 

 

 

 

 

 

 

24,101 

 

 

 

 

 

 

Total assets

 

$

1,036,954 

 

 

 

 

 

 

$

795,295 

 

 

 

 

 

 

$

589,724 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

 

$

402,273 

 

$

3,157 

 

0.78 

 

$

291,969 

 

$

2,208 

 

0.76 

 

$

202,850 

 

$

1,832 

 

0.90 

 

Money market checking

 

 

38,332 

 

 

191 

 

0.50 

 

 

23,715 

 

 

72 

 

0.30 

 

 

29,683 

 

 

125 

 

0.42 

 

Savings

 

 

37,576 

 

 

126 

 

0.34 

 

 

31,039 

 

 

196 

 

0.63 

 

 

23,461 

 

 

137 

 

0.58 

 

IRAs

 

 

9,627 

 

 

113 

 

1.17 

 

 

9,495 

 

 

152 

 

1.60 

 

 

9,771 

 

 

232 

 

2.37 

 

CDs

 

 

222,609 

 

 

1,976 

 

0.89 

 

 

151,522 

 

 

1,349 

 

0.89 

 

 

136,571 

 

 

1,540 

 

1.13 

 

Repurchase agreements and federal funds sold

 

 

55,731 

 

 

291 

 

0.52 

 

 

80,166 

 

 

567 

 

0.71 

 

 

67,709 

 

 

511 

 

0.75 

 

FHLB and other borrowings

 

 

80,855 

 

 

1,087 

 

1.34 

 

 

63,763 

 

 

926 

 

1.45 

 

 

15,468 

 

 

466 

 

3.01 

 

Subordinated debt

 

 

19,011 

 

 

1,142 

 

6.01 

 

 

4,124 

 

 

79 

 

1.92 

 

 

4,124 

 

 

87 

 

2.11 

 

Total interest-bearing liabilities

 

 

866,014 

 

 

8,083 

 

0.93 

 

 

655,793 

 

 

5,549 

 

0.85 

 

 

489,637 

 

 

4,930 

 

1.01 

 

Non-interest bearing demand deposits

 

 

60,587 

 

 

 

 

 

 

 

52,002 

 

 

 

 

 

 

 

46,748 

 

 

 

 

 

 

Other liabilities

 

 

6,699 

 

 

 

 

 

 

 

8,786 

 

 

 

 

 

 

 

3,315 

 

 

 

 

 

 

Total liabilities

 

 

933,300 

 

 

 

 

 

 

 

716,581 

 

 

 

 

 

 

 

539,700 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

12,471 

 

 

 

 

 

 

 

8,500 

 

 

 

 

 

 

 

8,500 

 

 

 

 

 

 

Common stock

 

 

7,958 

 

 

 

 

 

 

 

3,373 

 

 

 

 

 

 

 

2,243 

 

 

 

 

 

 

Paid-in capital

 

 

72,308 

 

 

 

 

 

 

 

58,217 

 

 

 

 

 

 

 

32,605 

 

 

 

 

 

 

Treasury stock

 

 

(1,084)

 

 

 

 

 

 

 

(1,084)

 

 

 

 

 

 

 

(1,083)

 

 

 

 

 

 

Retained earnings

 

 

14,554 

 

 

 

 

 

 

 

11,387 

 

 

 

 

 

 

 

8,401 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

(2,553)

 

 

 

 

 

 

 

(1,679)

 

 

 

 

 

 

 

(642)

 

 

 

 

 

 

Total stockholders’ equity

 

 

103,654 

 

 

 

 

 

 

 

78,714 

 

 

 

 

 

 

 

50,024 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,036,954 

 

 

 

 

 

 

$

795,295 

 

 

 

 

 

 

$

589,724 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

2.91 

 

 

 

 

 

 

 

2.91 

 

 

 

 

 

 

 

3.00 

 

Net interest income-margin

 

 

 

 

$

28,331 

 

2.99 

%  

 

 

 

$

21,411 

 

2.99 

%