UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
¨ | 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) |
Registrants 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 x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act. Yes ¨ No x.
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 x 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 registrants 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-K.
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
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 | x |
Based upon the average selling price of sales known to the Registrant of the common shares of the Registrant during the period through March 11, 2011, the aggregate market value of the common shares of the Registrant held by non affiliates during that time was $21,840,000. For this purpose certain executive officers and directors are considered affiliates.
Portions of the registrants definitive proxy statement relating to the Annual Meeting to be held May 17, 2011, are incorporated by reference into Part III of this Annual Report on Form 10-K.
As of March 11, 2011, the Registrant had 2,235,026 shares of common stock outstanding with a par value of $1.
PART I
MVB Financial Corp., or MVB, was formed on January 1, 2004 as a bank holding company. MVB Bank, Inc., or 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. During the fourth quarter of 2004, MVB formed two second-tier holding companies MVB Marion, Inc. and MVB Harrison, Inc., which have since been merged to form MVB Central, Inc. to manage the banking operations of MVB, the sole bank subsidiary, in those markets. In August of 2005, MVB opened a full service office in neighboring Harrison County. During October of 2005 MVB purchased a branch office in Jefferson County, situated in West Virginias eastern panhandle. In 2006 MVB formed another second-tier holding company, MVB East, Inc. to manage the banking operations of MVB in the Jefferson and Berkeley county markets.
MVB operates five offices, two of which are located in Marion County, the main office located at 301 Virginia Avenue in Fairmont and a branch office at 2500 Fairmont Avenue inside the Shop N Save Supermarket in White Hall, WV. The remaining offices are located at 1000 Johnson Avenue in Bridgeport, Harrison County, 88 Somerset Boulevard in Charles Town, Jefferson County and 651 Foxcroft Avenue in Martinsburg, Berkeley County. At December 31, 2010, MVB had total assets of $414.3 million, total loans of $294.0 million, total deposits of $300.4 million and total stockholders equity of $30.8 million.
MVBs business activities are currently confined to a single segment which is community banking. As a community banking entity, MVB 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, MVB offers non-deposit investment products through an association with a broker-dealer, and also offers correspondent lending services to assist other community banks in offering longer term fixed rate loan products that may be sold into the secondary market.
At December 31, 2010, MVB had 84 full-time and 15 part-time employees. MVBs principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800. MVBs Internet web site is www.mvbbanking.com.
Since the opening date of January 4, 1999, MVB has experienced significant growth in assets, loans, and deposits due to overwhelming community and customer support in the Marion and Harrison county markets, and expansion into West Virginias eastern panhandle.
During 2010, MVB continued to focus on growth in the Harrison, Berkeley and Jefferson County areas as the primary method for reaching performance goals. MVB continuously reviews key performance indicators to measure our success.
Market Area
MVBs primary market areas are the Marion, Harrison, Jefferson and Berkeley Counties of West Virginia, which includes a total of 97 banking facilities. 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 2000. The population of Fairmont has fluctuated from 23,863 in 1980; 20,210 in 1990; 19,097 in 2000 and 19,031 in 2009, or a net decline of 4,832 or 20.2%. Marion County increased its population from 1980 to 1990, 55,789 to 57,249, decreased to 56,598 in 2000 and increased to 56,706 in 2009. These changes resulted in a net increase of 1.64%. 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 Countys population
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decreased from 69,371 in 1990 to 68,652 in 2000, then increased to 68,911 in 2009 while Bridgeports population has increased from 7,306 in 2000 to an estimated 7,935 in 2009, 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 52,750 in 2009. During this period, Charles Town has seen an increase in population of 67.4% to 4,865 in 2009. Berkeley Countys population has grown from 75,905 in 2000 to an estimated 103,854 in 2009, making it the second-most populous county in West Virginia. Martinsburgs population has increased 14.3% since 2000 to 17,112 in 2009.
Unemployment in Marion County has improved compared to that of the State of West Virginia from November 1995 through December 2010. As of December 2010, the overall state rate was 9.5% compared to 7.9% for Marion County. During this same period of time, the Marion County Unemployment Rate has decreased from 8.9% to 7.9%, while the West Virginia rate increased from 7.5% to 9.5%. At December 31, 2010, Harrison, Jefferson and Berkeley counties showed unemployment rates of 8.3%, 7.2% and 9.7%, respectively. Marion, Harrison and Jefferson Countys rates are better than the state average, and Berkeley Countys rate is slightly worse than the state average. The future direction of unemployment will probably be driven by what occurs economically on a national level.
MVB 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, MVB retains most of its originated loans (exclusive of certain long-term, fixed rate residential mortgages that are sold servicing released). However, loans originated in excess of MVBs legal lending limit are participated to other banking institutions and the servicing of those loans is retained by MVB. MVB has no loans to foreign entities. MVBs lending market area is primarily concentrated in the Marion, Harrison, Berkeley and Jefferson Counties of West Virginia.
Commercial Loans
At December 31, 2010, MVB had outstanding approximately $194.6 million in commercial loans, including commercial, commercial real estate, financial and agricultural loans. These loans represented approximately 66.2% 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, MVB reviews collateral to determine its value in relation to the loan in the event of a foreclosure.
MVB evaluates all new commercial loans, and on an annual basis mortgage loans in excess of $300,000, as well as customers that have total outstanding loans that aggregate more than $500,000. If deterioration in credit worthiness has occurred, MVB 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, 2010, MVB had outstanding consumer loans in an aggregate amount of approximately $13.3 million or approximately 4.5% of the aggregate total loan portfolio.
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Lending Practices. Consumer loans generally involve more risk as to collectibility 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 borrowers 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 MVB 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, 2010, MVB had approximately $86.0 million of residential real estate loans, home equity lines of credit, and construction mortgages outstanding, representing 29.3% of total loans outstanding.
Lending Practices. MVB 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, MVB may lend up to 100% of the appraised value of the real estate. The risk conditions of these loans are considered during underwriting for the purposes of establishing an interest rate compatible with the risks inherent in mortgage lending and based on the equity of the home. Loans made in this lending category are generally one to five year adjustable rate, fully amortizing to maturity mortgages. MVB also originates fixed rate real estate loans and generally sells these loans in the secondary market, servicing released. Most real estate loans are secured by first mortgages with evidence of title in favor of MVB in the form of an attorneys opinion of the title or a title insurance policy. MVB also requires proof of hazard insurance with MVB named as the mortgagee and as the loss payee. Full appraisals are obtained from licensed appraisers for all loans secured by real estate.
Home Equity Loans. Home equity lines of credit are generally made as second mortgages by MVB. 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. MVB 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 propertys 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
MVB 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. MVB believes that its community approach provides flexibility, which enables the bank to offer an array of banking products and services.
MVB primarily focuses on the Marion, Harrison, Jefferson and Berkeley County markets for its products and services. Management believes MVB has developed a niche and a level of expertise in serving this area.
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MVB operates under a needs-based selling approach that management believes has proven successful in serving the financial needs of most customers. It is not MVBs 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 MVBs 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 MVB and its subsidiaries and is qualified in its entirety by reference to such statutes and regulations:
Bank Holding Company Regulation. MVB is a bank holding company under the Bank Holding Company Act of 1956, which restricts the activities of MVB and any acquisition by MVB of voting stock or assets of any bank, savings association or other company. MVB is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. MVBs subsidiary bank, MVB Bank, Inc., is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to MVB or its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of MVB and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to MVB and other subsidiaries. MVB is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. MVB 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 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 MVB.
Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, MVBs chief executive officer and chief financial officer are each required to certify that MVBs 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 MVBs internal controls; they have made certain disclosures to MVBs auditors and the audit committee of the Board of Directors about MVBs internal controls; and they have included information in MVBs Quarterly and Annual Reports about their evaluation and whether there have been significant changes in MVBs 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.
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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 Banking 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.
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 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 banks 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 banks 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.
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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 Banks risk-based capital requirements, see Note 14 of the Notes to the Financial Statements included in Item 8 of this Form 10-K.
West Virginia Division of Banking. State banks, such as MVB Bank, Inc. are subject to similar capital requirements adopted by the West Virginia Division of Banking.
Limits on Dividends
MVBs ability to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends the Bank declares. However, the Federal Reserve Board expects MVB to serve as a source of strength to the Bank. The Federal Reserve Board may require MVB 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 Banking if a dividend in any year would cause the total dividends for that year to exceed the sum of the current years net earnings as defined and the retained earnings for the preceding two years as defined, less required transfers to surplus. These provisions could limit MVBs 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.
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, MVB cannot predict future changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
MVBs primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, MVB 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
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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.
MVB 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.
No response required.
ITEM 1B. UNRESOLVED STAFF COMMENTS
No response required.
MVB Bank, Inc. owns its main office located at 301 Virginia Avenue in Fairmont, along with its offices at 1000 Johnson Avenue in Bridgeport, 88 Somerset Boulevard in Charles Town and 651 Foxcroft Avenue in Martinsburg. The Bank leases its office at 2500 Fairmont Avenue inside the Shop N Save supermarket in White Hall, in addition to the land at the Bridgeport location.
Additional information concerning the property and equipment owned or leased by MVB and its subsidiaries is incorporated herein by reference from Note 4, Bank Premises and Equipment and Note 16, Leases of the Notes to the Financial Statements included in Item 8 of this Form 10-K.
There are no pending legal proceedings to which MVB or its subsidiaries are a party or to which any of their property is subject.
No response required.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES
MVBs 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 MVBs common shares. The information set forth in the table is based on MVBs 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.
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Quarterly Market and Dividend Information:
2010 | 2009 | |||||||||||||||
Estimated Market Value Per Share |
Dividend | Estimated Market Value Per Share |
Dividend | |||||||||||||
Fourth Quarter |
$ | 21.00 | $ | 0.10 | $ | 20.00 | $ | 0.10 | ||||||||
Third Quarter |
20.00 | 0.00 | 20.00 | 0.00 | ||||||||||||
Second Quarter |
20.00 | 0.00 | 20.00 | 0.00 | ||||||||||||
First Quarter |
20.00 | 0.00 | 20.00 | 0.00 |
MVB had 1,010 stockholders of record at December 31, 2010. MVB began paying an annual dividend of $.10 per share beginning in December 2008. No dividends were paid prior to 2008.
Equity Compensation Plan Information
Plan Category |
Number of securities to be issued upon exercise of outstanding options (a) |
Weighted-average exercise price of outstanding options (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||||||
Equity compensation plans approved by security holders |
115,297 | $ | 16.00 | 23,190 | ||||||||
Equity compensation plans not approved by security holders |
n/a | n/a | n/a | |||||||||
Total |
115,297 | $ | 16.00 | 23,190 | ||||||||
During the fourth quarter of 2010, 9,000 stock options under MVBs equity compensation plan were exercised.
ITEM 6. SELECTED FINANCIAL DATA
No response required.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements:
The following discussion contains statements that refer to future expectations, contain projections of the results of operations or of financial condition, or state other information that is forward-looking. Forward-looking statements are easily identified by the use of words such as could, anticipate, estimate, believe, and similar words that refer to a future outlook. There is always a degree of uncertainty associated with forward-looking statements. MVBs management believes that the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated.
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Many factors could cause MVBs actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include:
| General economic conditions, either nationally or within MVBs market, could be less favorable than expected; |
| Changes in market interest rates could affect interest margins and profitability; |
| Competitive pressures could be greater than anticipated; |
| Legal or accounting changes could affect MVBs results; and |
| Adverse changes could occur in the securities and investments markets. |
In Managements 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 MVBs 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 S.R. Snodgrass, A.C. to audit the consolidated financial statements and their independent audit report is included herein.
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Introduction
The following discussion and analysis of the Consolidated Financial Statements of MVB is presented to provide insight into managements assessment of the financial results and operations of MVB. MVB Bank, Inc. is the sole operating subsidiary of MVB and all comments, unless otherwise noted, are related to the Bank. 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
MVBs 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 Bank 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 managements 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.
The allowance for loan losses represents managements 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 significant judgment and the use of estimates related to the amount and timing of losses inherent in classifications of homogeneous loans based on historical loss experience of peer banks, 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.
See Note 2 to the consolidated financial statements for MVBs policy regarding the other than temporary impairment of investment securities.
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Recent Accounting Pronouncements and Developments
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial Assets. ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. ASU 2009-16 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Companys financial position or results of operation.
In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of this guidance did not have a material impact on the Companys financial position.
In January 2010, the FASB issued ASU 2010-05, Compensation Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staffs views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. ASU 2010-05 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Companys financial position.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Companys financial statements.
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Companys financial position.
In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging. ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in ASC 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a significant impact on the Companys financial statements.
In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset a consensus of the FASB Emerging Issues Task Force. ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later and is not expected to have a significant impact on the Companys financial statements.
In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entitys credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are
13
effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company is currently evaluating the impact the adoption of this guidance will have on the Companys financial position or results of operations.
In August, 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This ASU amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies and is not expected to have a significant impact on the Companys financial statements.
In August, 2010, the FASB issued ASU 2010-22, Technical Corrections to SEC Paragraphs An announcement made by the staff of the U.S. Securities and Exchange Commission. This ASU amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics and is not expected to have a significant impact on the Companys financial statements.
In September, 2010, the FASB issued ASU 2010-25, Plan Accounting Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Companys financial statements.
In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Companys financial statements.
In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Companys financial statements.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Companys financial statements.
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Several other new accounting standards became effective during the periods presented or will be effective subsequent to December 31, 2009. None of these new standards had or is expected to have a significant impact on the Companys consolidated financial statements.
Summary Financial Results
MVB earned $2.2 million in 2010 compared to $1.4 million in 2009, an increase of $831,000. The earnings equated to a 2010 return on average assets of .57% and a return on average equity of 7.98%, compared to prior year results of .45% and 5.26%, respectively. Basic earnings per share were $1.40 in 2010 compared to $.88 in 2009. Diluted earnings per share were $1.38 in 2010 compared to $.86 in 2009. The most significant factor in the increase in 2010 profitability was a 2.0 million increase in net interest income. This increase was largely the result of the following: continuing to deploy excess capital by investing in bank certificates of deposit funded by wholesale deposits to earn a spread of around 1%, which resulted in additional income of $351,000; a reduction in net interest expense of $63,000 despite deposit growth of $35.9 million, the result of a decrease in interest rates on interest-bearing liabilities; the increase in net interest and fees on loans of $1.6 million which was the result of loan growth of $61.2 million in 2010 and an increase in interest on investment securities of $230,000, the result of the investment portfolio increasing by $25.4 million in 2010. Other income increased $264,000, the result of the following: a $109,000 increase in other operating income which was driven by a $61,000 gain on OREO sale and a $45,000 increase in mortgage loan underwriting income; an $88,000 increase in gain on sale of investment securities sold and a $74,000 increase in debit card income, the result of increased debit card activity relating to MVChecking. Another major increase in net income from 2009 was the reduction in investment impairment losses of $186,000. On the expense side salaries and employee benefits saw the largest increase in 2010, an increase of $555,000 from 2009, the result of the addition of four new commercial lenders, correspondent lending, the first employee incentive payout under MVBs revised plan which paid a bonus of 2.5% of each eligible employees salary at year end based upon net income, deposit and loan goals achieved, and normal annual salary adjustments for existing staff. The next largest area of increase in expenses in 2010 was consulting expense which increased $136,000 from 2009, the result of additional use of the BankVue MVChecking product along with the addition of the use of outside consultants in the areas of strategic planning and interest rate risk analysis. FDIC insurance increased by $79,000, the result of deposit growth and Visa debit card expense increased $57,000 the result of expanded usage through the MVChecking product.
MVBs yield on earning assets in 2010 was 4.42% compared to 5.07% in 2009. This decrease in yield is attributable to the following: a 25 basis point decline in the yield on loans, a 164 basis point decline in the investment portfolio yield and a 51 basis point decline on other bank certificates of deposit. Despite extensive competition, total loans increased to $294.0 million at December 31, 2010, from $232.8 million at December 31, 2009. The Banks ability to originate quality loans is supported by a minimal delinquency rate. The decrease in yield on the investment portfolio is attributable to increasing the portfolios size by $33.6 million or 110% from 2009, all of which was done at rates significantly lower than the existing portfolio.
Deposits increased $35.9 million to $300.4 million at December 31, 2010, from $264.5 million at December 31, 2009, due to the following: $24 million in growth from public funds deposits in Harrison and Berkeley counties, $11 million in additional broker buster money, $4.1 million in non interest-bearing deposit growth, $3.8 million in MVChecking and $3.6 million in savings account balances, $2.6 million of which is our newest product, MVSavings. Certificate of deposit balances declined by $7.6 million and brokered money decreased by $10.7 million, the result of the decrease in the CD arbitrage built during 2008 and 2009. MVB 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 1.66% in 2010 compared to 2.14% in 2009. This cost of funds, combined with the earning asset yield, resulted in a net interest margin of 2.94% in 2010 compared to 3.11% in 2009.
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The Bank maintained a high-quality, short-term investment portfolio during 2009 to provide liquidity in the balance sheet, to fund loan growth, for repurchase agreements and to provide security for state and municipal deposits.
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 MVB. 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 MVBs balance sheet. As noted above, the net interest margin was 2.94% in 2010 compared to 3.11% in 2009. The net interest margin continues to face considerable pressure due to competitive pricing of loans and deposits in MVBs markets. During 2010, the Federal Reserve did not change rates. Managements estimate of the impact of future changes in market interest rates is shown in the section captioned Interest Rate Risk.
Management continues to analyze methods to deploy MVBs 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 2010, net interest income increased by $2.0 million or 22.9% to $10.8 million from $8.8 million in 2009. This increase is largely due to the growth in average earning assets, primarily $61.2 million in loans and $25.4 million in investments. Average total earning assets were $368.1 million in 2010 compared to $282.7 million in 2009. Average total loans grew to $261.1 million in 2010 from $219.4 million in 2009. Primarily as a result of this growth, total interest income increased by $2.0 million, or 13.6%, to $16.3 million in 2010 from $14.3 million in 2009. Average interest-bearing liabilities, mainly deposits, likewise increased in 2010 by $70.9 million. Average interest-bearing deposits grew to $263.6 million in 2010 from $209.3 million in 2009. Total interest expense decreased by $63,000 despite the $70.9 million in average interest bearing liabilities growth. This decrease in interest expense was the result of a 48 basis point decrease in interest cost from 2009 to 2010.
MVBs yield on earning assets changed during 2010 as follows: The loan portfolio yield decreased by 25 basis points and MVBs investment portfolio yield decreased by 164 basis points while funding yields decreased by 48 basis points.
The cost of interest-bearing liabilities decreased to 1.66% in 2010 from 2.14% in 2009. This decrease is primarily the result of reduced cost of funds as follows: Certificates of deposit costs decreased 63 basis points, IRA costs decreased 67 basis points, MMDA costs decreased 15 basis points and NOW accounts costs decreased 13 basis points.
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Statistical Financial Information Regarding MVB Financial Corp.
The following tables provide further information about MVBs interest income and expense:
Average Balances and Analysis of Net Interest Income:
2010 | 2009 | |||||||||||||||||||||||
Average Balance |
Interest Income/ Expense |
Yield/ Cost |
Average Balance |
Interest Income/ Expense |
Yield/ Cost |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-bearing deposits in banks |
$ | 10,501 | $ | 19 | 0.18 | % | $ | 2,784 | $ | 14 | 0.50 | % | ||||||||||||
CDs with other banks |
35,061 | 568 | 1.62 | 32,189 | 685 | 2.13 | ||||||||||||||||||
Investment securities |
64,104 | 1,677 | 2.62 | 30,456 | 1,298 | 4.26 | ||||||||||||||||||
Loans |
||||||||||||||||||||||||
Commercial |
159,887 | 8,518 | 5.33 | 141,275 | 7,723 | 5.47 | ||||||||||||||||||
Tax exempt |
13,000 | 555 | 4.27 | 11,497 | 496 | 4.31 | ||||||||||||||||||
Real estate |
73,862 | 3,994 | 5.41 | 52,838 | 3,126 | 5.92 | ||||||||||||||||||
Consumer |
14,367 | 956 | 6.65 | 13,746 | 995 | 7.24 | ||||||||||||||||||
Allowance for loan losses |
(2,647 | ) | (2,088 | ) | ||||||||||||||||||||
Net loans |
258,469 | 14,023 | 5.43 | 217,268 | 12,340 | 5.68 | ||||||||||||||||||
Total earning assets |
368,135 | 16,287 | 4.42 | 282,697 | 14,337 | 5.07 | ||||||||||||||||||
Cash and due from banks |
2,271 | 8,254 | ||||||||||||||||||||||
Other assets |
19,944 | 19,236 | ||||||||||||||||||||||
Total assets |
$ | 390,350 | $ | 310,187 | ||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
Non-interest bearing demand |
$ | 30,295 | $ | | $ | 22,764 | $ | | ||||||||||||||||
NOW |
90,801 | 1,172 | 1.29 | 40,308 | 572 | 1.42 | ||||||||||||||||||
Money market checking |
32,215 | 310 | 0.96 | 28,862 | 319 | 1.11 | ||||||||||||||||||
Savings |
8,160 | 11 | 0.13 | 7,190 | 7 | 0.10 | ||||||||||||||||||
IRAs |
10,816 | 337 | 3.12 | 8,805 | 334 | 3.79 | ||||||||||||||||||
CDs |
121,626 | 2,571 | 2.11 | 124,094 | 3,398 | 2.74 | ||||||||||||||||||
Repurchase agreements and federal funds |
||||||||||||||||||||||||
Sold |
44,238 | 474 | 1.07 | 27,800 | 262 | 0.94 | ||||||||||||||||||
Federal Home Loan Bank borrowings |
17,445 | 513 | 2.94 | 17,387 | 532 | 3.06 | ||||||||||||||||||
Long-term debt |
4,124 | 82 | 1.99 | 4,124 | 109 | 2.64 | ||||||||||||||||||
Total interest-bearing liabilities |
329,425 | 5,470 | 1.66 | 258,570 | 5,533 | 2.14 | ||||||||||||||||||
Other liabilities |
2,593 | 2,107 | ||||||||||||||||||||||
Total liabilities |
362,313 | 283,441 | ||||||||||||||||||||||
Stockholders equity |
||||||||||||||||||||||||
Common stock |
1,633 | 1,624 | ||||||||||||||||||||||
Paid-in capital |
20,457 | 20,392 | ||||||||||||||||||||||
Treasury stock |
(745 | ) | (505 | ) | ||||||||||||||||||||
Retained earnings |
6,848 | 5,540 | ||||||||||||||||||||||
Accumulated other comprehensive income |
(156 | ) | (305 | ) | ||||||||||||||||||||
Total stockholders equity |
28,037 | 26,746 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 390,350 | $ | 310,187 | ||||||||||||||||||||
Net interest spread |
|
2.76 | 2.93 | |||||||||||||||||||||
Impact of non-interest bearing funds on margin |
|
0.17 | 0.18 | |||||||||||||||||||||
Net interest income-margin |
|
$ | 10,817 | 2.94 | % | $ | 8,804 | 3.11 | % | |||||||||||||||
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Provision for Loan Losses
MVBs provision for loan losses for 2010 and 2009 were approximately $1.1 million and $785,000, respectively. This increase principally relates to the increase in loans outstanding.
Determining the appropriate level of the Allowance for Loan Losses (ALL) requires considerable management judgment. In exercising this judgment, management considers numerous internal and external factors including, but not limited to, portfolio growth, national and local economic conditions, trends in the markets served and guidance from the Banks primary regulators. Management seeks to maintain an ALL that is appropriate in the circumstances and that complies with applicable accounting and regulatory standards. Further discussion can be found later in this discussion under Allowance for Loan Losses.
Non-Interest Income
Fees related to deposit accounts and cash management accounts and income on loans held for sale represent the significant portion of the Banks primary non-interest income. The total of non-interest income for 2010 was $2.5 million versus $2.2 million in 2009.
The most significant increase in non-interest income from 2010 to 2009 was $109,000 in other operating income. This increase is primarily the result of increased Visa debit card income of $74,000 and $64,000 in gains on the sale of other real estate owned. Additionally MVB recognized $88,000 in gains on sale of investment securities during 2010.
The Bank is constantly searching for new non-interest income opportunities that enhance income and provide customer benefits.
Non-Interest Expense
Non-interest Expense was $9.1 million in 2010 versus $8.3 million in 2009. Approximately 52% and 51% of non-interest expense for 2010 and 2009, respectively, related to personnel costs. Personnel are the lifeblood of every service organization, which is why personnel cost, is such a significant part of the expenditure mix. Salaries and benefits increased by $555,000 in 2010, the result of the addition of four new commercial lenders, a correspondent mortgage lending program and increases for existing staff.
In the second quarter of 2009, Silverton Bank, N.A., a correspondent bank in which MVB held stock failed. This resulted in an $186,000 pretax loss to MVB in 2009.
Data processing expense declined by $139,000 during 2010, the result of the renegotiation of MVBs data processing contract.
Consulting expense increased by $136,000 in 2010. This increase related to the implementation of a new interest rate risk consulting relationship, the increased usage of consultants in the area of strategic planning and the continued development of our MVChecking and MVSavings products through BankVue.
FDIC insurance premiums increased by $79,000, the result of continued significant deposit growth.
Visa debit card expense increased by $57,000, the result of increased card usage through the MVChecking product which increased income by $74,000.
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2009 compared to 2008
Net interest income increased by $1.1 million when comparing 2009 with 2008 results. This increase is largely due to growth in average earning assets, primarily loans, of $30.3 million in 2009. Average interest-bearing liabilities, mainly deposits, increased by $68.7 million in 2009. This increase was due mainly to the addition of two new products, the broker buster account designed to take back money lost to brokerage firms and MVChecking, a higher rate checking account designed to reward customer behaviors that increase the banks revenue stream.
A large portion of non-interest income is comprised of fees related to deposit accounts and cash management accounts. Non-interest income was $2.2 million in 2009 compared to $1.8 million in 2008. This increase was due primarily to increased focus on secondary market loans, along with continued increases in service charges on deposit accounts, Visa debit card income, title insurance income, investment commissions and Visa credit card income.
Non-interest expense reached $8.3 million in 2009 compared to $7.8 million in 2008. This increase was the result of the following: $336,000 increase in FDIC insurance costs, $255,000 in increased other operating expenses, $219,000 in increased salaries expense and $74,000 in increased advertising expense.
Income Taxes
MVB incurred income tax expense of $795,000 in 2010 and $454,000 in 2009.
The effective tax rate was 26% in 2010 and 24% 2009.
Return on Assets
MVBs return on average assets was .57% in 2010, .45% in 2009 and .35% in 2008. The increased return in 2010 is a direct result of the following: an increase in interest income of $2.0 million, $186,000 reduction in investment impairment losses and $139,000 reduction in data processing expense.
Return on Equity
MVBs return on average stockholders equity (ROE) was 7.98% in 2010, compared to 5.26% in 2009 and 3.22% in 2008. The increased return in 2010 is a direct result of the following: an increase in interest income of $2.0 million, $186,000 reduction in investment impairment losses and $139,000 reduction in data processing expense.
Overview of the Statement of Condition
The MVB balance sheet changed significantly from 2009 to 2010. Certificates of deposit with banks decreased $31.7 million. Loans increased by $61.2 million to $294.0 million at December 31, 2010. Investments increased by 25.4 million, deposits increased by $35.9 million, repurchase agreements increased by $12.0 million, FHLB borrowings increased by $9.4 million and stockholders equity increased by $3.6 million.
Cash and Cash Equivalents
MVBs cash and cash equivalents totaled $3.7 million at December 31, 2010, compared to $2.3 million at December 31, 2009.
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Management believes the current balance of cash and cash equivalents adequately serves MVBs liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes the liquidity needs of MVB are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable MVB to meet cash obligations as they come due.
Investment Securities
Investment securities totaled $69.3 million at December 31, 2010, compared to $43.9 million at December 31, 2009. This $25.4 million increase is mainly the result of the acquisition of public fund deposits that require collateralization.
MVBs investment securities are primarily classified as available-for-sale. Management believes the available-for-sale classification provides flexibility for MVB in terms of managing the portfolio for liquidity, yield enhancement and interest rate risk management opportunities. At December 31, 2010, the amortized cost of MVBs investment securities totaled $68.6 million, resulting in unrealized gain in the investment portfolio of $662,000.
Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through Asset and Liability Committee (ALCO) meetings. The ALCO also monitors net interest income and manages interest rate risk for MVB. Through active balance sheet management and analysis of the investment securities portfolio, MVB maintains sufficient liquidity to satisfy depositor requirements and the various credit needs of its customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.
The Company evaluated its holding of Federal Home Loan Bank of Pittsburgh (FHLB) stock for impairment and deemed the stock to not be impaired due to the expected recoverability of the par value, which equals the value reflected within the Companys financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within the FHLBs mortgage portfolio to the FHLBs liquidity position and credit rating. The Company utilizes the impairment framework outlined in paragraph 8(i) of SOP 01-06 and paragraphs 12.21 12.25 of the AICPA Audit Guide for Depository and Lending Institutions to evaluate FHLB stock for impairment. The following factors were evaluated to determine the ultimate recoverability of the par value of the FHLB stock holding.
a. | The significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted. |
The suspension of stock redemptions and dividend payments will provide the FHLB with the means to build capital. This will reduce the likelihood that any owner of FHLB stock will ultimately incur a loss in the future. In addition, the FHLBs historical ability and commitment to holding investments until maturity is projected to reduce the unrealized loss within the mortgage portfolio from $13.5 billion to an estimated embedded economic loss of less than $1 billion, which will further enhance capital and the ultimate recoverability of the par value of stock.
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b. | Commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB. |
The Company is not aware of any significant/unusual commitments made by the FHLB that would impact future financial performance, dividend rates, or the ultimate recoverability of the stock holding at par value.
c. | The impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB. |
The level of government support received by the FHLB ensures its ability to meet its obligations and therefore provide for the ultimate recoverability of the stock at par value. The level of government support includes access to the U.S. Government-Sponsored Enterprise Credit Facility as a liquidity backstop, which will allow the FHLB to continue serving its customer base. The Company believes that the level of government support provides further evidence as to the recoverability of the stock holding at par value.
d. | The liquidity position of the FHLB. |
The FHLB maintains contingency liquidity in accordance with Finance Agency and Board of Director policy in addition to access to the U.S. Government-Sponsored Enterprise Credit Facility. Contingency liquidity includes: marketable assets with a maturity of one year or less, self-liquidating assets with a maturity of one year or less, collateral generally accepted in the repurchase market, and lines of credit with financial institutions receiving no less than the second highest credit rating from a nationally recognized rating organization. The level of liquidity will ensure the FHLB continues to service its customers and serves as the base for the ultimate recoverability of the stock holding at par value.
e. | Whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institutions operational needs for the foreseeable future allow management to dispose of the stock. |
The Company does not deem the holding of FHLB stock to be material in terms of financial performance or liquidity position. The Company does not rely on the payment of dividends from the FHLB as a source of income, but rather the Company considers the stock part of conducting business. While the FHLB is utilized as a source of funding, the Company has other avenues to obtain funding ranging from customer deposits, other financial institutions, CDARS deposits, brokered money and other wholesale sources. The Companys current liquidity plan does not contemplate any cash generated from the sale of its FHLB capital stock. The ability to reduce FHLB funding reliance through other sources illustrates that the importance of liquidating FHLB stock is not essential to the overall liquidity position of the Company.
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Late in 2010 the FHLB redeemed capital stock held by MVB in the amount of $96,000, as their earnings improved and they liquidated some of their private label mortgage back portfolio.
Loans
MVBs lending is primarily focused in Marion, Harrison, Berkeley and Jefferson County, West Virginia with a secondary focus on the adjacent counties in West Virginia. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages and consumer lending. Loans totaled $294.0 million as of December 31, 2010, compared to $232.8 million at December 31, 2009.
During 2010, MVB experienced loan growth of $61.2 million, $41.9 million in Harrison County, $15.8 million in Jefferson and Berkeley counties combined and $3.5 million in Marion County. The most significant portion of the growth came in the residential real estate and commercial and non-residential real estate area. Residential real estate loans grew $18.5 million and commercial and non-residential real estate loans grew approximately $42.1 million.
At December 31, 2010, commercial loans represented the largest portion of the portfolio approximating 66.2% of the total loan portfolio. Commercial loans totaled $194.7 million at December 31, 2010, compared to $152.4 million at December 31, 2009. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance.
Residential real estate loans to MVBs retail customers (including home equity lines of credit) account for the second largest portion of the loan portfolio, comprising 29.3% of MVBs total loan portfolio. Residential real estate loans totaled $86.0 million at December 31, 2010, compared to $67.5 million at December 31, 2009. Included in residential real estate loans are home equity credit lines totaling $14.3 million at December 31, 2010, compared to $14.6 million at December 31, 2009. Management believes the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residential real estate lending continues to represent a primary focus of MVBs lending due to the lower risk factors associated with this type of loan and the opportunity to provide service to those in the Marion, Harrison, Berkeley and Jefferson County markets. Consumer lending continues to be a part of MVBs core lending. At December 31, 2010, consumer loan balances totaled $13.3 million compared to $12.9 million at December 31, 2009. The majority of MVBs consumer loans are in the direct lending area. Management is pleased with the performance and quality of the consumer loan portfolio, which can be attributed to the many years of experience of its consumer lenders. This is another important product necessary to serve MVBs market areas.
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The following table provides additional information about MVBs loans:
Loan maturities at December 31, 2010:
(Dollars in Thousands) |
||||||||||||||||
One Year or Less |
One Thru Five Years |
Due After Five Years |
Total | |||||||||||||
Commercial and nonresidential real estate |
$ | 48,026 | $ | 55,841 | $ | 90,833 | $ | 194,700 | ||||||||
Residential real estate |
8,634 | 14,360 | 63,026 | 86,020 | ||||||||||||
Consumer and other |
3,695 | 7,201 | 2,428 | 13,324 | ||||||||||||
Total |
$ | 60,355 | $ | 77,402 | $ | 156,287 | $ | 294,044 | ||||||||
The preceding data has been compiled based upon the earlier of either contractual maturity or next repricing date
Loan Portfolio Analysis:
(Dollars in Thousands) | 2010 | 2009 | ||||||
Year-end balances: |
||||||||
Commercial, financial and agricultural |
194,700 | 152,426 | ||||||
Real estate |
86,020 | 67,507 | ||||||
Consumer |
13,324 | 12,914 | ||||||
Total |
294,044 | 232,847 | ||||||
Loan Concentration
At December 31, 2010, commercial loans comprised the largest component of the loan portfolio. There are very few commercial loans that are not secured by real estate. Such non-real estate secured loans generally are lines of credit secured by accounts receivable. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries but primarily located in our market areas.
Allowance for Loan Losses
Management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity, where applicable, local market rumors, which are generally based on some factual information, and changes in the local and national economy. While local market rumors are not measurable or perhaps not readily supportable, historically, this form of information has been a valuable indication of a potential problem.
23
The result of the evaluation of the adequacy at each period presented herein indicated that the allowance for loan losses was considered adequate to absorb losses inherent in the loan portfolio.
At December 31, 2010 and 2009 MVB had impaired loans totaling $856,000 and $461,000 respectively. Included in these totals were non-accrual loans totaling $519,000 and $0 respectively. A portion of the Allowance for Loan Losses was allocated to cover any loss in these loans. Loans past due more than 30 days were $2.6 million and $2.2 million, respectively, at December 31, 2010 and 2009.
December 31 | ||||||||
2010 | 2009 | |||||||
Loans past due more than 30 days to gross loans |
0.89 | % | 0.95 | % | ||||
Loans past due more than 90 days to gross loans |
0.19 | % | 0.42 | % |
MVB incurred net charge-offs of $863,000 in 2010 and $404,000 in 2009. MVBs provision for loan losses was $1.1 million in 2010 and $785,000 in 2009. Net charge-offs represented .33% and .18% in 2010 and 2009, respectively, compared to average outstanding loans for the indicated period.
2010 | 2009 | |||||||
Balance, January 1 |
$ | 2,241 | $ | 1,860 | ||||
Provision |
1,100 | 785 | ||||||
Charge-offs |
912 | 453 | ||||||
Recoveries |
(49 | ) | (49 | ) | ||||
Less: Net charge-offs |
863 | 404 | ||||||
Balance, December 31 |
$ | 2,478 | $ | 2,241 | ||||
The following table reflects the allocation of the allowance for loan losses as of December 31:
(Dollars in Thousands) | 2010 | 2009 | ||||||
Allocation of allowance for loan losses at December 31: |
||||||||
Commercial |
$ | 1,517 | $ | 2,107 | ||||
Real estate |
667 | 51 | ||||||
Consumer |
294 | 83 | ||||||
Total |
$ | 2,478 | $ | 2,241 | ||||
Percent of loans to total loans at December 31: |
||||||||
Commercial |
66 | % | 66 | % | ||||
Real estate |
29 | 29 | ||||||
Consumer |
5 | 5 | ||||||
Total |
100 | % | 100 | % | ||||
Non-performing assets consist of loans that are no longer accruing interest, loans that have been renegotiated to below market rates based upon financial difficulties of the borrower, and real estate acquired through foreclosure. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. When, in managements judgment, the borrowers ability to make periodic interest and principal payments resumes and collectability is no longer in doubt, the loan is returned to accrual status.
24
Non-performing assets and past due loans:
(Dollars in Thousands) | 2010 | 2009 | ||||||
Non-accrual loans |
||||||||
Commercial |
$ | 828 | $ | | ||||
Real estate |
1,243 | | ||||||
Consumer |
158 | | ||||||
Total non-accrual loans |
2,229 | | ||||||
Renegotiated loans |
| | ||||||
Total non-performing loans |
2,229 | | ||||||
Other real estate, net |
402 | 1,171 | ||||||
Total non-performing assets |
$ | 2,631 | $ | 1,171 | ||||
Accruing loans past due 90 days or more |
562 | 979 | ||||||
Non-performing loans as a % of total loans |
0.76 | % | | |||||
Allowance for loan losses as a % of non-performing loans |
111.17 | % | |
Funding Sources
MVB considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds for MVB, totaling $300.4 million, or 79.8% of MVBs funding sources at December 31, 2010. This same information at December 31, 2009 reflected $264.5 million in deposits representing 82.8% of such funding sources. Cash management accounts, which are available to large corporate customers, represented 12.6% and 11.2% of MVBs funding sources at December 31, 2010 and 2009, respectively. Borrowings from the Federal Home Loan Bank of Pittsburgh for specific purposes represented the remainder of such funding sources.
Management continues to emphasize the development of additional non-interest-bearing deposits as a core funding source for MVB. At December 31, 2010, non-interest-bearing balances totaled $28.4 million compared to $23.5 million at December 31, 2009 or 9.5% and 8.9% of total deposits respectively.
Interest-bearing deposits totaled $272.0 million at December 31, 2010, compared to $241.0 million at December 31, 2009. On a percentage basis, Certificates of Deposits compose the largest component of MVBs deposits. Average interest-bearing liabilities totaled $329.4 million during 2010 compared to $258.6 million during 2009. Average non-interest bearing liabilities totaled $32.9 million during 2010 compared to $24.9 million during 2009. Management will continue to emphasize deposit gathering in 2011 by offering outstanding customer service and competitively priced products.
Maturities of Certificates of Deposit $100,000 or more:
(Dollars in Thousands) | 2010 | |||
Under 3 months Over 3-6 months |
$
|
17,574 10,368 |
| |
Over 6 to 12 months |
12,674 | |||
Over 12 months |
18,045 | |||
Total |
$ | 58,661 | ||
There are no other time deposits of $100,000 or more.
Federal Home Loan Bank borrowings and repurchase agreements:
25
(Dollars in Thousands) | 2010 | 2009 | ||||||
Ending balance |
$ | 76,237 | $ | 54,839 | ||||
Average balance |
65,807 | 45,187 | ||||||
Highest month-end balance |
80,361 | 63,309 | ||||||
Interest expense |
987 | 795 | ||||||
Weighted average interest rate: |
||||||||
End of Year |
1.34 | % | 1.53 | % | ||||
During the Year |
1.62 | % | 1.76 | % |
Along with traditional deposits, MVB has access to both overnight repurchase agreements and Federal Home Loan Bank borrowings to fund its operations and investments. MVBs repurchase agreements totaled $47.6 million at December 31, 2010, compared to $35.6 million in 2009. Federal Home Loan Bank borrowings totaled $28.6 million at December 31, 2010, compared to $19.2 million at year-end 2009.
Capital/Stockholders Equity
During the year ended December 31, 2010, stockholders equity increased approximately $3.6 million to $30.8 million. This increase consists of MVBs net income for the year of $2.2 million, along with a capital raise of $8.3 million to accredited investors during December 2010 and January 2011, $1.7 million of which had been received as of year end. MVB paid dividends of $160,000 in 2010 and $160,000 in 2009.
At December 31, 2010, accumulated other comprehensive income (loss) totaled ($263,000), a decrease in the loss of $80,000 from December 31, 2009. This principally represents net unrealized loss on available-for-sale securities, net of income taxes, and the adjustment to pension liability, net of income taxes, at December 31, 2010. Because the vast majority of all the investment securities in MVBs portfolio are classified as available-for-sale, both the investment and equity sections of MVBs balance sheet are more sensitive to the changing market values of investments than those institutions that classify more of their investment portfolio as held to maturity. Interest rate fluctuations between year-end 2010 and 2009 resulted in the change in market value of the portfolio.
MVB has also complied with the standards of capital adequacy mandated by the banking industry. Bank regulators have established risk-based capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk assets), 20%, 50%, or 100% (highest risk assets) is assigned to each asset on the balance sheet. Detailed information concerning MVBs risk-based capital ratios can be found in Note 14 of the Notes to the Audited Financial Statements. At December 31, 2010, MVBs risk-based capital ratios were above the minimum standards for a well-capitalized institution. MVBs risk-based capital ratio of 13.3% at December 31, 2010, is above the well-capitalized standard of 10%. MVBs Tier 1 capital ratio of 12.4% also exceeded the well-capitalized minimum of 6%. The leverage ratio at December 31, 2010, was 8.2% and was also above the well-capitalized standard of 5%. Management believes MVBs capital continues to provide a strong base for profitable growth.
Liquidity and Interest Rate Sensitivity
The objective of MVBs asset/liability management function is to maintain consistent growth in net interest income within its policy guidelines. This objective is accomplished through management of MVBs balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels, and customer preferences.
26
Interest Rate Risk
The most significant market risk resulting from MVBs normal course of business, extending loans and accepting deposits, is interest rate risk. Interest rate risk is the potential for economic loss due to future interest rate changes which can impact both the earnings stream as well as market values of financial assets and liabilities. MVBs Asset/ Liability Committee (ALCO) is responsible for the overall review and management of the Banks balance sheets related to the management of interest rate risk. The ALCO strives to keep MVB focused on the future, anticipating and exploring alternatives, rather than simply reacting to change after the fact.
To this end, the ALCO has established an interest risk management policy that sets the minimum requirements and guidelines for monitoring and controlling the level and amount of interest rate risk. The objective of the interest rate risk policy is to encourage management to adhere to sound fundamentals of banking while allowing sufficient flexibility to exercise the creativity and innovations necessary to meet the challenges of changing markets. The ultimate goal of these policies is to optimize net interest income within the constraints of prudent capital adequacy, liquidity, and safety.
The ALCO relies on different methods of assessing interest rate risk including simulating net interest income, monitoring the sensitivity of the net present market value of equity or economic value of equity, and monitoring the difference or gap between maturing or rate-sensitive assets and liabilities over various time periods. The ALCO places emphasis on simulation modeling as the most beneficial measurement of interest rate risk due to its dynamic measure. By employing a simulation process that measures the impact of potential changes in interest rates and balance sheet structures, and by establishing limits on changes in net income and net market value, the ALCO is better able to evaluate the possible risks associated with alternative strategies.
The simulation process starts with a base case simulation which represents projections of current balance sheet growth trends. Base case simulation results are prepared under a flat interest rate forecast and what is perceived to be the most likely alternative interest rate forecast. Comparisons showing the earnings variance from the flat rate forecast illustrate the risks associated with the current balance sheet strategy. If necessary, additional balance sheet strategies are developed and simulations prepared. The results from model simulations are reviewed for indications of whether current interest rate risk strategies are accomplishing their goal and, if not, what alternative strategies should be considered. The policy calls for periodic review by the ALCO of assumptions used in the modeling.
The ALCO believes that it is beneficial to monitor interest rate risk for both the short-and long-term. Therefore, to effectively evaluate results from model simulations, limits on changes in net interest income and the value of the balance sheet have been established. The ALCO has determined that the earnings at risk of the Bank shall not change more than 10 % from the base case for a 1% shift in interest rates, nor more than 15 % from the base case for a 2% shift in interest rates. MVB is in compliance with this policy as of December 31, 2010.
27
The following table is provided to show the earnings at risk of MVB as of December 31, 2010.
(Dollars in Thousands) | ||||||||
Immediate Change (one year time frame) |
Estimated Increase (Decrease) in Net Interest Income December 31, 2010 |
|||||||
Amount | Percent | |||||||
+200 |
$ | 13,790 | -0.1 | % | ||||
+100 |
13,787 | -0.1 | % | |||||
Base rate |
13,789 | |||||||
-100 |
13,693 | -0.70 | % | |||||
-200 |
$ | 13,617 | -1.25 | % |
Liquidity
Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand, and deposit withdrawals, without incurring a sustained negative impact on net interest income. It is MVBs policy to manage liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions.
The main source of liquidity for MVB comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans, and income from loans and investment securities. During the year ended December 31, 2010, cash provided by financing activities totaled $58.6 million, while outflows from investing activity totaled $62.2 million. When appropriate, MVB has the ability to take advantage of external sources of funds such as advances from the Federal Home Loan Bank (FHLB), national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and CDARS. These external sources often provide attractive interest rates and flexible maturity dates that enable MVB to match funding with contractual maturity dates of assets. Securities in the investment portfolio are primarily classified as available-for-sale and can be utilized as an additional source of liquidity.
Off-Balance Sheet Commitments
MVB has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on MVBs financial statements and could have a significant impact in future periods. Specifically, MVB has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. Further discussion of these agreements, including the amounts outstanding at December 31, 2010, is included in Note 7 to the financial statements.
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
Fourth Quarter
MVBs fourth quarter net income was $682,000 in 2010 compared to $256,000 in the fourth quarter of 2009. This equated to basic earnings per share, on a quarterly basis, of $.43 in 2010 and $.16 in 2009. Diluted earnings per share for the fourth quarter of 2010 and 2009 were $.42 and $.15, respectively. Net interest income increased during the fourth quarter and was $3.0 million in the fourth quarter of
28
2010 compared to $2.3 million in 2009. Non-interest income was $729,000 in the fourth quarter of 2010 compared to $546,000 in 2009. Non-interest expense increased to $2.6 million for the fourth quarter of 2010 from $2.2 million in 2009. Loan loss provision was $340,000 for the fourth quarter of 2010, an increase of $29,000 over the fourth quarter of 2009.
Future Outlook
The Banks net income in 2010 was better than in any prior year, despite the challenges of a continued poor economic climate. MVB believes it is well positioned in some of the finest markets in the state of West Virginia. We believe with continued customer acceptance in our markets and our commitment to customer service, we will continue to capture market share with our emphasis on the highest quality products and technology.
Future plans for the Bank involve the Bank taking advantage of both technology and personal customer contact. The Bank continues to expand delivery channels to better serve both retail and business banking customers. In addition to top of the line technology, the Bank is committed to providing individual and personal banking services. MVB will continue to search for quality banking locations as well as exploring alternative delivery systems.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No response required.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MVB Financial Corp.
Consolidated Balance Sheets
(Dollars in thousands, except number of shares)
December 31, 2010 and 2009
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 3,713 | $ | 2,321 | ||||
Interest bearing balances with banks |
10,091 | 3,935 | ||||||
Certificates of deposit with other banks |
17,734 | 49,442 | ||||||
Investment Securities: |
||||||||
Securities held-to-maturity, at cost |
7,460 | 6,594 | ||||||
Securities available-for-sale, at approximate fair value |
61,824 | 37,292 | ||||||
Loans: |
294,044 | 232,847 | ||||||
Less: Allowance for loan losses |
(2,478 | ) | (2,241 | ) | ||||
Net Loans |
291,566 | 230,606 | ||||||
Loans held for sale |
1,839 | 1,764 | ||||||
Bank premises, furniture and equipment |
7,579 | 7,757 | ||||||
Accrued interest receivable and other assets |
12,461 | 13,051 | ||||||
TOTAL ASSETS |
$ | 414,267 | $ | 352,762 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 28,449 | $ | 23,493 | ||||
Interest bearing |
271,985 | 241,038 | ||||||
Total Deposits |
300,434 | 264,531 | ||||||
Accrued interest, taxes, and other liabilities |
2,703 | 2,130 | ||||||
Repurchase agreements |
47,623 | 35,641 | ||||||
FHLB and other borrowings |
28,614 | 19,198 | ||||||
Long-term debt |
4,124 | 4,124 | ||||||
Total Liabilities |
383,498 | 325,624 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, par value $1,000; 5,000 shares authorized, none issued |
||||||||
Common stock, par value $1; 4,000,000 shares authorized; 1,802,391 and 1,629,971 shares issued respectively |
1,802 | 1,629 | ||||||
Additional paid-in capital |
23,864 | 20,457 | ||||||
Common stock paid for but not issued, par value $1; 90,560 shares |
1,729 | | ||||||
Treasury Stock, 47,218 and 23,036 shares, respectively |
(1,006 | ) | (522 | ) | ||||
Retained earnings |
4,643 | 5,917 | ||||||
Accumulated other comprehensive loss |
(263 | ) | (343 | ) | ||||
Total Stockholders Equity |
30,769 | 27,138 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 414,267 | $ | 352,762 | ||||
See Notes to Consolidated Financial Statements
30
MVB Financial Corp.
Consolidated Statements of Income
(Dollars in thousands except Share and Per Share Data)
Years ended December 31, 2010 and 2009
2010 | 2009 | |||||||
INTEREST INCOME |
||||||||
Interest and fees on loans |
$ | 13,468 | $ | 11,844 | ||||
Interest on deposits with other banks |
587 | 699 | ||||||
Interest on investment securities - taxable |
1,427 | 1,197 | ||||||
Interest on tax exempt loans and securities |
805 | 597 | ||||||
Total interest income |
16,287 | 14,337 | ||||||
INTEREST EXPENSE |
||||||||
Interest on deposits |
4,401 | 4,630 | ||||||
Interest on repurchase agreements |
474 | 262 | ||||||
Interest on FHLB and other borrowings |
513 | 533 | ||||||
Interest on long-term debt |
82 | 108 | ||||||
Total interest expense |
5,470 | 5,533 | ||||||
NET INTEREST INCOME |
10,817 | 8,804 | ||||||
Provision for loan losses |
1,100 | 785 | ||||||
Net interest income after provision for loan losses |
9,717 | 8,019 | ||||||
OTHER INCOME |
||||||||
Service charges on deposit accounts |
658 | 770 | ||||||
Income on bank owned life insurance |
265 | 178 | ||||||
Visa debit card income |
361 | 287 | ||||||
Income on loans held for sale |
634 | 616 | ||||||
Gain on sale of securities |
88 | | ||||||
Other operating income |
448 | 339 | ||||||
2,454 | 2,190 | |||||||
OTHER EXPENSES |
||||||||
Salaries and employee benefits |
4,796 | 4,241 | ||||||
Occupancy expense |
590 | 569 | ||||||
Equipment depreciation and maintenance |
472 | 423 | ||||||
Data processing |
392 | 531 | ||||||
Visa debit card expense |
295 | 238 | ||||||
Advertising |
338 | 309 | ||||||
Legal and accounting fees |
167 | 174 | ||||||
Printing, stationery and supplies |
130 | 98 | ||||||
Consulting fees |
211 | 75 | ||||||
FDIC insurance |
523 | 444 | ||||||
Other taxes |
190 | 177 | ||||||
Other operating expenses |
1,035 | 884 | ||||||
Loss on investment impairment |
| 186 | ||||||
9,139 | 8,349 | |||||||
Income before income taxes |
3,032 | 1,860 | ||||||
Income tax expense |
795 | 454 | ||||||
Net Income |
$ | 2,237 | $ | 1,406 | ||||
Basic net income per share |
$ | 1.40 | $ | 0.88 | ||||
Diluted net income per share |
$ | 1.38 | $ | 0.86 | ||||
Basic weighted average shares outstanding |
1,598,432 | 1,601,986 | ||||||
Diluted weighted average shares outstanding |
1,625,884 | 1,628,102 |
See Notes to Consolidated Financial Statements
31
MVB Financial Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2010 and 2009
2010 | 2009 | |||||||
OPERATING ACTIVITIES |
||||||||
Net Income |
$ | 2,237 | $ | 1,406 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
1,100 | 785 | ||||||
Deferred income tax (benefit) |
(144 | ) | (39 | ) | ||||
Depreciation |
447 | 445 | ||||||
Stock based compensation |
46 | 15 | ||||||
Loans originated for sale |
(46,657 | ) | (53,353 | ) | ||||
Proceeds of loans sold |
46,582 | 52,704 | ||||||
Proceeds from sale of other real estate owned |
866 | 252 | ||||||
(Gain)/loss on sale of other real estate owned |
(61 | ) | 27 | |||||
(Gain) on sale of investment securities |
(88 | ) | | |||||
Amortization, net of accretion |
513 | 117 | ||||||
Loss on investment impairment |
| 186 | ||||||
(Increase) in interest receivable and other assets |
(409 | ) | (3,029 | ) | ||||
Increase in accrued interest, taxes, and other liabilities |
573 | 295 | ||||||
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES |
5,005 | (189 | ) | |||||
INVESTING ACTIVITIES |
||||||||
(Increase) in loans made to customers |
(62,060 | ) | (29,600 | ) | ||||
Purchases of premises and equipment |
(269 | ) | (142 | ) | ||||
Purchases of investment securities available-for-sale |
(69,602 | ) | (32,542 | ) | ||||
Purchases of investment securities held-to-maturity |
(1,359 | ) | (4,899 | ) | ||||
(Increase) in deposits with FHLB and Fed, net |
(6,156 | ) | (3,895 | ) | ||||
Purchases of certificates of deposit with other banks |
(16,321 | ) | (61,489 | ) | ||||
Proceeds from maturity of certificates of deposit with other banks |
48,029 | 19,047 | ||||||
Proceeds from sales, maturities and calls of securities available-for-sale |
45,082 | 12,851 | ||||||
Proceeds from maturities and calls of securities held-to-maturity |
474 | 7,101 | ||||||
Purchase of bank owned life insurance |
| (1,000 | ) | |||||
NET CASH (USED IN) INVESTING ACTIVITIES |
(62,182 | ) | (94,568 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net increase in deposits |
35,903 | 91,466 | ||||||
Net increase in repurchase agreements |
11,982 | 13,737 | ||||||
Proceeds from FHLB and other borrowings |
205,716 | 9,000 | ||||||
Principal payments on FHLB and other borrowings |
(196,300 | ) | (21,744 | ) | ||||
Purchase of treasury stock |
(484 | ) | (223 | ) | ||||
Net proceeds of stock offering |
1,729 | | ||||||
Cash dividend |
(160 | ) | (160 | ) | ||||
Common stock options exercised |
183 | 292 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
58,569 | 92,368 | ||||||
Increase/(decrease) in cash and cash equivalents |
1,392 | (2,389 | ) | |||||
Cash and cash equivalents at beginning of period |
2,321 | 4,710 | ||||||
Cash and cash equivalents at end of period |
$ | 3,713 | $ | 2,321 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash payments for: |
||||||||
Interest on deposits, repurchase agreements and FHLB borrowings |
$ | 5,623 | $ | 5,488 | ||||
Income taxes |
$ | 811 | $ | 607 |
See Notes to Consolidated Financial Statements
32
MVB Financial Corp.
Consolidated Statements of Changes in Stockholders Equity
Years ended December 31, 2010 and 2009
(Dollars in thousands)
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income/(loss) |
Treasury Stock |
Total Stockholders Equity |
|||||||||||||||||||
Balance, December 31, 2008 |
$ | 1,604 | $ | 20,175 | $ | 4,671 | $ | (315 | ) | $ | (299 | ) | $ | 25,836 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net Income |
1,406 | 1,406 | ||||||||||||||||||||||
Other comprehensive income(loss) |
||||||||||||||||||||||||
Net fair value adjustment on securities available for sale, less reclassification adjustment for realized losses - net of tax effect of $(31) |
(46 | ) | (46 | ) | ||||||||||||||||||||
Total Comprehensive Income |
1,360 | |||||||||||||||||||||||
Minimum pension liability adjustment - net of tax effect |
18 | 18 | ||||||||||||||||||||||
Cash dividends paid ($0.10 per share) |
(160 | ) | (160 | ) | ||||||||||||||||||||
Stock based compensation |
15 | 15 | ||||||||||||||||||||||
Treasury stock, acquired at cost |
(223 | ) | (223 | ) | ||||||||||||||||||||
Common stock options execised |
25 | 267 | 292 | |||||||||||||||||||||
Balance, December 31, 2009 |
$ | 1,629 | $ | 20,457 | $ | 5,917 | $ | (343 | ) | $ | (522 | ) | $ | 27,138 | ||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net Income |
2,237 | 2,237 | ||||||||||||||||||||||
Other comprehensive income(loss) |
||||||||||||||||||||||||
Net fair value adjustment on securities available for sale, less reclassification adjustment for realized gains - net of tax effect of $(167) |
251 | 251 | ||||||||||||||||||||||
Total Comprehensive Income |
2,488 | |||||||||||||||||||||||
Minimum pension liability adjustment - net of tax effect |
(171 | ) | (171 | ) | ||||||||||||||||||||
Cash dividends paid ($0.10 per share) |
(160 | ) | (160 | ) | ||||||||||||||||||||
Stock offering in process |
1,729 | 1,729 | ||||||||||||||||||||||
Stock based compensation |
46 | 46 | ||||||||||||||||||||||
Stock dividend - 10% stock dividend |
160 | 3,191 | (3,351 | ) | | |||||||||||||||||||
Treasury stock, acquired at cost |
(484 | ) | (484 | ) | ||||||||||||||||||||
Common stock options exercised |
13 | 170 | 183 | |||||||||||||||||||||
Balance, December 31, 2010 |
$ | 1,802 | $ | 25,593 | $ | 4,643 | $ | (263 | ) | $ | (1,006 | ) | $ | 30,769 | ||||||||||
See Notes to Consolidated Financial Statements
33
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
MVB Financial Corp., the Company, provides banking services to the domestic market with the primary market areas being the Marion, Harrison, Jefferson and Berkeley counties of West Virginia. To a large extent, the operations of the Company, such as loan portfolio management and deposit growth, are directly affected by the market area economies.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks with original maturities of ninety days or less.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MVB Financial Corp. Inc., and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual results could differ from these estimates.
Investment Securities
Debt securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premium and accretion of discounts computed by the interest method from purchase date to maturity. Other marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on securities available-for-sale, net of the deferred income tax effect, are recognized as direct increases or decreases in stockholders equity. Cost of securities sold is recognized using the specific identification method.
Loans Held for Sale
Through Crescent Mortgage Company, Franklin American Mortgage and Freddie MAC, MVB Bank, Inc. has the ability to offer customers long-term fixed rate mortgage products without holding these instruments in the banks loan portfolio. MVB values loans held for sale at the lower of cost or market. After thorough review of the process the Company has concluded that no material derivative instruments exist, as the bank obtains pricing information directly from the websites of the secondary mortgage providers and locks in pricing based upon pre-established margins set by management.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Loans are considered delinquent when scheduled principal or interest payments are 31 days past due. Interest income on loans is recognized on an accrual basis. The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio. The Company consistently applies a quarterly loan review process to continually evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses, and is based upon periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
34
The allowance consists of specific and general components. The specific component relates to loans that are impaired. The general component covers non-classified loans and is based upon historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and shortages generally are not classified as impaired. Generally the Company considers impaired loans to include loans classified as non-accrual loans and loans past due for longer than 90 days.
Loan Origination Fees and Costs
Accounting standards require that loan origination and commitment fees and direct loan origination costs be deferred and the net amount amortized as an adjustment of the related loans yield.
Bank Premises, Furniture and Equipment
Bank premises, furniture and equipment are carried at cost less accumulated depreciation. The provision for depreciation is computed for financial reporting by the straight-line-method based on the estimated useful lives of assets, which range from 7 to 40 years on buildings and leasehold improvements and 3 to 10 years on furniture, fixtures and equipment.
Intangible Assets
The excess of the cost of an acquired company over the fair value of the net assets and identified intangibles acquired is recorded as goodwill. The net carrying amount of intangible assets was $927 and $941 at December 31, 2010 and 2009, respectively.
Other Investments
Federal Home Loan Bank (FHLB) stock is recorded at cost and considered to be restricted as the Company is required by the FHLB to hold this investment, and the only market for this stock is the issuing agency. FHLB stock totaled $1,816 and $1,911 at December 31, 2010 and 2009, respectively, and is included in other assets in the accompanying balance sheet.
Income Taxes
Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes. The differences relate principally to accretion of discounts on investment securities, provision for loan losses, minimum pension liability, and differences between book and tax methods of depreciation.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with generally accepted accounting standards. Under these standards the Company is required to record compensation expense for all awards granted after the date of adoption and for any unvested options previously granted.
Foreclosed Assets Held for Resale
Foreclosed assets held for resale acquired in satisfaction of mortgage obligations and in foreclosure proceedings are recorded at the lower of cost or fair value less estimated selling costs at the time of foreclosure, with any valuation adjustments charged to the allowance for loan losses. Any unrealized gains or losses on sale are then recorded in other non-interest expense. At December 31, 2010 and 2009, the Company held other real estate of $402 and $1,171.
35
Net Income Per Common Share
Diluted net income per common share includes any dilutive effects of stock options, and is computed by dividing net income by the average number of common shares outstanding during the period, adjusted for the dilutive effect of options under the Companys 2003 Stock Incentive Plan.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and minimum pension liability, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Endorsement Split-Dollar Life Insurance Arrangements
The Company accounts for certain endorsement split-dollar life insurance arrangements by recognizing both the cash surrender value of the insurance asset as well as the liability for the death benefit provided to the employee.
Reclassifications
Certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 financial statement presentation.
NOTE 2. INVESTMENT SECURITIES
Amortized cost and approximate fair values of investment securities held-to-maturity at December 31, 2010, including gross unrealized gains and losses, are summarized as follows:
(Dollars in thousands) | Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Approximate Fair Value |
||||||||||||
Municipal securities |
6,460 | 27 | (62 | ) | 6,425 | |||||||||||
U. S. Agency securities |
1,000 | 17 | | 1,017 | ||||||||||||
$ | 7,460 | $ | 44 | $ | (62 | ) | $ | 7,442 | ||||||||
Amortized cost and approximate fair values of investment securities held-to-maturity at December 31, 2009, including gross unrealized gains and losses, are summarized as follows:
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Approximate Fair Value |
|||||||||||||
Municipal securities |
5,594 | 16 | (59 | ) | 5,551 | |||||||||||
U. S. Agency securities |
1,000 | 59 | | 1,059 | ||||||||||||
$ | 6,594 | $ | 75 | $ | (59 | ) | $ | 6,610 | ||||||||
Amortized cost and approximate fair values of investment securities available-for-sale at December 31, 2010 are summarized as follows:
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Approximate Fair Value |
|||||||||||||
U. S. Agency securities |
$ | 34,903 | $ | 453 | $ | (76 | ) | $ | 35,280 | |||||||
Mortgage-backed securities |
26,135 | 306 | (21 | ) | 26,420 | |||||||||||
Other securities |
124 | | | 124 | ||||||||||||
$ | 61,162 | $ | 759 | $ | (97 | ) | $ | 61,824 | ||||||||
36
Amortized cost and approximate fair values of investment securities available-for-sale at December 31, 2009 are summarized as follows:
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Approximate Fair Value |
|||||||||||||
U. S. Agency securities |
$ | 16,122 | $ | 196 | $ | (18 | ) | $ | 16,300 | |||||||
Mortgage-backed securities |
20,802 | 111 | (45 | ) | 20,868 | |||||||||||
Other securities |
124 | | | 124 | ||||||||||||
$ | 37,048 | $ | 307 | $ | (63 | ) | $ | 37,292 | ||||||||
The following tables summarize amortized cost and approximate fair values of securities by maturity:
December 31, 2010 | ||||||||||||||||
Held to Maturity | Available for sale | |||||||||||||||
Amortized Cost |
Approximate Fair Value |
Amortized Cost |
Approximate Fair Value |
|||||||||||||
Within one year |
$ | | $ | | $ | | $ | | ||||||||
After one year, but within five |
115 | 115 | 29,324 | 29,515 | ||||||||||||
After five years, but within ten |
2,609 | 2,618 | 2,852 | 2,922 | ||||||||||||
After ten Years |
4,736 | 4,709 | 28,986 | 29,387 | ||||||||||||
Total |
$ | 7,460 | $ | 7,442 | $ | 61,162 | $ | 61,824 | ||||||||
Investment securities with a carrying value of $66,426 and $24,724 at December 31, 2010 and 2009, respectively, were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve discount window.
The Companys investment portfolio includes securities that are in an unrealized loss position as of December 31, 2010, the details of which are included in the following table. Although these securities, if sold at December 31, 2010 would result in a pretax loss of $159, the Company has no intent to sell the applicable securities at such market values, and maintains the Company has the ability to hold these securities until all principal has been recovered. Declines in the market values of these securities can be traced to general market conditions which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Companys ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated. As of December 31, 2010, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline in market value.
37
The following table discloses investments in an unrealized loss position:
At December 31, 2010, total temporary impairment totaled $159.
Less than 12 months | 12 months or more | |||||||||||||||
Description and number of positions |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||
U.S. Agencies (6) |
$ | 8,966 | $ | (76 | ) | $ | | $ | | |||||||
Mortgage-backed securities (6) |
8,533 | (21 | ) | | | |||||||||||
Municipal securities (14) |
3,782 | (62 | ) | | | |||||||||||
$ | 21,281 | $ | (159 | ) | $ | | $ | | ||||||||
NOTE 3. LOANS
The components of loans in the balance sheet at December 31, were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Commercial and non-residential real estate |
$ | 194,605 | $ | 152,463 | ||||
Residential real estate |
86,020 | 67,507 | ||||||
Consumer and other |
13,324 | 12,914 | ||||||
Net deferred fees and costs |
95 | (37 | ) | |||||
$ | 294,044 | $ | 232,847 | |||||
Changes in the allowance for loan losses were as follows for the years ended December 31:
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at beginning of period |
$ | 2,241 | $ | 1,860 | ||||
Losses charged to allowance |
(912 | ) | (453 | ) | ||||
Recoveries credited to allowance |
49 | 49 | ||||||
Provision for loan losses |
1,100 | 785 | ||||||
Balance at end of period |
$ | 2,478 | $ | 2,241 | ||||
The following table summarizes the primary segments of the loan portfolio as of December 31, 2010 (in thousands):
Commercial | Residential | Home Equity |
Installment | Credit Cards |
Total | |||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total Loans |
$ | 194,700 | $ | 71,686 | $ | 14,334 | $ | 12,830 | $ | 494 | $ | 294,044 | ||||||||||||
Individually evaluated for impairment |
$ | 393 | $ | 197 | $ | 262 | $ | 0 | $ | 4 | $ | 856 | ||||||||||||
Collectively evaluated for impairment |
$ | 194,307 | $ | 71,489 | $ | 14,072 | $ | 12,830 | $ | 490 | $ | 293,188 |
38
Management evaluates individual loans in all of the commercial segments for possible impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Corporation also separately evaluates individual consumer and residential mortgage loans for impairment.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loans effective interest rate; (b) the loans observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2010 (in thousands):
Impaired Loans with Specific Allowance |
Impaired Loans with No Specific Allowance |
Total Impaired Loans | ||||||||||||||||||
Recorded Investment |
Related Allowance |
Recorded Investment |
Recorded Investment |
Unpaid Principal Balance |
||||||||||||||||
December 31, 2010 |
||||||||||||||||||||
Commercial |
$ | 59 | $ | 20 | $ | 334 | $ | 393 | $ | 393 | ||||||||||
Residential |
165 | 75 | 32 | 197 | 197 | |||||||||||||||
Home Equity |
262 | 99 | 0 | 262 | 262 | |||||||||||||||
Installment |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Credit Card |
4 | 4 | 0 | 4 | 4 | |||||||||||||||
Total impaired loans |
$ | 490 | $ | 198 | $ | 366 | $ | 856 | $ | 856 | ||||||||||
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands):
December | ||||||||
2010 | 2009 | |||||||
Average investment in impaired loans |
$ | 1,901 | $ | 2,369 | ||||
Interest income recognized on an accrual basis on impaired loans |
$ | 76 | $ | 95 |
39
Management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Banks Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships $500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance
The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2010 (in thousands):
Pass | Special Mention |
Substandard | Doubtful | Total | ||||||||||||||||
December 31, 2010 |
||||||||||||||||||||
Commercial |
$ | 180,568 | $ | 8,294 | $ | 5,446 | $ | 392 | $ | 194,700 | ||||||||||
Residential |
69,906 | 613 | 1,002 | 165 | 71,686 | |||||||||||||||
Home Equity |
13,945 | 99 | 262 | 28 | 14,334 | |||||||||||||||
Installment |
12,424 | 233 | 173 | | 12,830 | |||||||||||||||
Credit Card |
488 | | 6 | | 494 | |||||||||||||||
Total |
$ | 277,331 | $ | 9,239 | $ | 6,889 | $ | 585 | $ | 294,044 | ||||||||||
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2010 (in thousands):
40
Current | 30-59 Days Past Due |
60-89 Days Past Due |
90 Days Past Due |
Total Past Due |
Non- Accrual |
Total Loans |
||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||
Commercial |
$ | 193,414 | 241 | | $ | 217 | $ | 458 | $ | 828 | $ | 194,700 | ||||||||||||||||
Residential |
68,529 | 1,761 | 272 | 143 | 2,176 | 981 | 71,686 | |||||||||||||||||||||
Home Equity |
13,979 | 28 | 18 | 47 | 93 | 262 | 14,334 | |||||||||||||||||||||
Installment |
12,222 | 141 | 158 | 155 | 454 | 154 | 12,830 | |||||||||||||||||||||
Credit Card |
490 | | | | | 4 | 494 | |||||||||||||||||||||
Total |
$ | 288,634 | $ | 2,171 | $ | 448 | $ | 562 | $ | 3,181 | $ | 2,229 | $ | 294,044 | ||||||||||||||
An allowance for loan losses (ALL) is maintained to absorb losses from the loan portfolio. The ALL is based on managements continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Banks methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Banks ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualified factors.
The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Commercial, Mortgage and Consumer pools currently utilize a rolling 12 quarters.
Pass rated credits are segregated from Criticized credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volume and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
Historically, management has utilized an internally developed spreadsheet to track and apply the various components of the allowance.
41
The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2010. Activity in the allowance is presented for the year ended December 31, 2010 (in thousands):
Commercial | Residential | Home Equity |
Installment | Credit Card |
Total | |||||||||||||||||||
ALL balance at December 31, 2009 |
$ | 1,717 | $ | 204 | $ | 84 | $ | 216 | $ | 20 | $ | 2,241 | ||||||||||||
Charge-offs |
(547 | ) | (57 | ) | (67 | ) | (241 | ) | | (912 | ) | |||||||||||||
Recoveries |
| 36 | 9 | 4 | | 49 | ||||||||||||||||||
Provision |
347 | 277 | 181 | 295 | | 1,100 | ||||||||||||||||||
ALL balance at December 31, 2010 |
$ | 1,517 | $ | 460 | $ | 207 | $ | 274 | $ | 20 | $ | 2,478 | ||||||||||||
Individually evaluated for impairment |
$ | 975 | $ | 333 | $ | 139 | $ | 121 | $ | 6 | $ | 1,574 | ||||||||||||
Collectively evaluated for impairment |
$ | 542 | $ | 127 | $ | 68 | $ | 153 | $ | 14 | $ | 904 |
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
NOTE 4. BANK PREMISES, FURNITURE AND EQUIPMENT
Bank premises, furniture and equipment at December 31, were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Bank Premises |
$ | 7,533 | $ | 7,516 | ||||
Equipment, furniture and fixtures |
2,893 | 2,641 | ||||||
10,426 | 10,157 | |||||||
Allowance for depreciation |
(2,847 | ) | (2,400 | ) | ||||
$ | 7,579 | $ | 7,757 | |||||
NOTE 5. DEPOSITS
Deposits at December 31, were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Demand deposits of individuals, partnerships, and corporations |
||||||||
Interest bearing |
$ | 77,970 | $ | 60,837 | ||||
Non-interest bearing |
27,984 | 23,123 | ||||||
Time and savings deposits of individuals, partnerships and corporations |
161,534 | 172,482 | ||||||
Deposits of states and political subdivisions |
32,431 | 7,319 | ||||||
Official checks |
515 | 770 | ||||||
Total Domestic Deposits |
$ | 300,434 | $ | 264,531 | ||||
Time deposits of over $100 included above |
$ | 58,661 | $ | 47,518 | ||||
42
Maturities of certificates of deposit at December 31, 2010 were as follows:
2011 |
$ | 55,472 | ||
2012 |
19,373 | |||
2013 |
10,920 | |||
2014 |
3,042 | |||
2015 |
4,757 | |||
Total |
$ | 93,564 | ||
NOTE 6. BORROWED FUNDS
The Company is a party to repurchase agreements with certain customers. As of December 31, 2010 and 2009, the company held repurchase agreements of $47,623 and $35,641. Information related to repurchase agreements is summarized below:
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at end of year |
$ | 47,623 | $ | 35,641 | ||||
Average balance during the year |
44,238 | 27,800 | ||||||
Maximum month-end balance |
55,550 | 46,163 | ||||||
Weighted-average rate during the year |
1.07 | % | 0.94 | % | ||||
Rate at December 31 |
1.00 | % | 0.97 | % |
MVB Bank, Inc. (the Bank) is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, Pennsylvania. The remaining maximum borrowing capacity with the FHLB at December 31, 2010 was approximately $112,194. At December 31, 2010 and 2009 the Bank had borrowed $24,114 and $19,198.
Borrowings from the FHLB as of December 31 were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Fixed interest rate note, originating April 1999, due April 2014, interest of 5.405% is payable monthly |
$ | 1,000 | $ | 1,000 | ||||
Fixed interest rate note, originating January 2005, due January 2020, payable in monthly installments of $11, including interest of 5.140% |
933 | 1,012 | ||||||
Fixed interest rate note, originating April 2002, due May 2017, payable in monthly installments of $4, including interest of 5.90% |
647 | 662 | ||||||
Floating interest rate note, originating March 2003, due December 2011, interest payable monthly, including interest of 0.68% |
14,126 | | ||||||
Fixed interest rate note, originating July 2006, due July 2016, payable in monthly installments of $8, including interest of 4.50% |
1,341 | 1,380 | ||||||
Fixed interest rate note, originating October 2006, due October 2021, payable in monthly installments of $6, including interest of 5.20% |
1,089 | 1,109 | ||||||
Fixed interest rate note, originating April 2007, due April 2022, payable in monthly installments of $6, including interest of 5.18% |
1,034 | 1,051 |
43
Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly installments of $5, including interest of 5.22% |
913 | 929 | ||||||
Fixed interest rate note, originating May 2009, due May 2010, interest of 0.72% payable quarterly |
| 5,000 | ||||||
Fixed interest rate note, originating November 2009, due May 2010, interest of 0.35% payable quarterly |
| 4,000 | ||||||
Fixed interest rate note, originating December 2007, due December 2017, payable in monthly installments of $7, including interest of 5.25% |
1,031 | 1,055 | ||||||
Fixed interest rate note, originating March 2008. due March 2013, interest of 2.37% payable quarterly |
2,000 | 2,000 | ||||||
$ | 24,114 | $ | 19,198 | |||||
In March 2007 the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the Trust). The Company established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The proceeds from the sale of the Trust Preferred Securities will be loaned to the Company under subordinated Debentures (the Debentures) issued to the Trust pursuant to an Indenture. The Debentures are the only asset of the Trust. The Trust Preferred Securities have been issued to a pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations. The securities issued by the Trust are includable for regulatory purposes as a component of the Companys Tier I capital.
The Trust Preferred Securities and the Debentures mature in 30 years and are redeemable by the Company after five years. Interest payments are due in March, June, September and December and are adjusted at the interest due dates at a rate of 1.62% over the three month LIBOR Rate. The Company reflects borrowed funds in the amount of $4.1 million as of December 31, 2010 and 2009 and interest expense of $82 and $109 for the years ended December 31, 2010 and 2009.
Borrowings from the FHLB are secured by stock in the FHLB of Pittsburgh, qualifying first mortgage loans, mortgage-backed securities and certain investment securities.
The bank had borrowed $4,500 in overnight funds at the Federal Reserve discount window on December 31, 2010 at a rate of 0.75%.
A summary of maturities of these borrowings over the next five years is as follows:
Year | Amount | |||
2011 |
$ | 18,847 | ||
2012 |
232 | |||
2013 |
2,244 | |||
2014 |
1,257 | |||
2015 |
271 | |||
Thereafter |
9,887 | |||
$ | 32,738 | |||
44
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on managements credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Companys policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
Total contractual amounts of the commitments as of December 31 were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Available on lines of credit |
$ | 32,539 | $ | 30,814 | ||||
Stand-by letters of credit |
758 | 1,642 | ||||||
Other loan commitments |
691 | 529 | ||||||
$ | 33,988 | $ | 32,985 | |||||
Concentration of Credit Risk
The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers throughout the Marion, Harrison, Jefferson and Berkeley County areas of West Virginia and adjacent counties. Collateral for loans is primarily residential and commercial real estate, personal property, and business equipment. The Company evaluates the credit worthiness of each of its customers on a case-by-case basis, and the amount of collateral it obtains is based upon managements credit evaluation.
Litigation
The subsidiary bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.
45
NOTE 8. INCOME TAXES
Accounting standards require that the Company use an asset and liability approach that requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities.
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of income and expense, primarily the provision for possible loan losses, allowance for losses on foreclosed assets held for resale, depreciation, and accretion of discounts on investment securities are reported in different accounting periods for income tax purposes.
The provisions for income taxes for the years ended December 31, were as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Current: |
||||||||
Federal |
$ | 773 | $ | 392 | ||||
State |
166 | 101 | ||||||
$ | 939 | $ | 493 | |||||
Deferred expense (benefit) |
||||||||
Federal |
$ | (119 | ) | $ | (32 | ) | ||
State |
(25 | ) | (7 | ) | ||||
(144 | ) | (39 | ) | |||||
Income Tax expense |
$ | 795 | $ | 454 | ||||
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
2010 | 2009 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Tax at Federal tax rate |
$ | 1,031 | 34.0 | % | $ | 632 | 34.0 | % | ||||||||
Tax effect of: |
||||||||||||||||
State income tax |
76 | 2.5 | % | 47 | 2.5 | % | ||||||||||
Tax exempt earnings |
(313 | ) | -10.3 | % | (226 | ) | -12.2 | % | ||||||||
Other |
1 | 0.0 | % | 1 | 0.0 | % | ||||||||||
$ | 795 | 26.2 | % | $ | 454 | 24.3 | % | |||||||||
Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and expense for income tax and financial statement purposes.
Deferred income tax liabilities and (assets) were comprised of the following at December 31:
2010 | 2009 | |||||||
Depreciation |
$ | 299 | $ | 318 | ||||
Unrealized loss on securities available-for-sale |
$ | 264 | $ | 98 | ||||
Pension |
(66 | ) | 45 | |||||
Gross deferred tax liabilities |
497 | 461 | ||||||
Allowance for loan losses |
(778 | ) | (765 | ) | ||||
Minimum pension liability |
(381 | ) | (326 | ) | ||||
Gross deferred tax (assets) |
(1,159 | ) | (1,091 | ) | ||||
Net deferred tax (asset) |
$ | (662 | ) | $ | (630 | ) | ||
46
No deferred income tax valuation allowance is provided since it is more likely than not that realization of the deferred income tax asset will occur in future years.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has granted loans to officers and directors of the Company and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of collectability. Set forth below is a summary of the related loan activity.
(Dollars in thousands) | Balance at Beginning of Year |
Borrowings | Repayments | Balance at end of Year |
||||||||||||
December 31, 2010 |
$ | 15,067 | $ | 764 | $ | (1,836 | ) | $ | 13,995 | |||||||
December 31, 2009 |
$ | 13,517 | $ | 2,468 | $ | (918 | ) | $ | 15,067 | |||||||
The Company held related party deposits of $11,812 and $10,941 at December 31, 2010 and December 31, 2009, respectively.
The Company held related party repurchase agreements of $1,697 and $1,585 at December 31, 2010 and December 31, 2009, respectively.
NOTE 10. PENSION PLAN
The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees. Benefits are based on years of service and the employees compensation. The Companys funding policy is to fund normal costs of the plan as accrued. Contributions are intended to provide not only for benefits attributed to service to date, but also for those benefits expected to be earned in the future. The Company participated in the pension plan beginning January 1, 1999. The Company has recognized estimated pension expense of $335 and $291 for the years ended December 31, 2010 and 2009.
Information pertaining to the activity in the Companys defined benefit plan, using the latest available actuarial valuations with a measurement date of December 31, 2010 and 2009 is as follows:
(Dollars in thousands) | 2010 | 2009 | ||||||
Change in benefit obligation |
||||||||
Benefit obligation at beginning of year |
$ | 2,389 | $ | 1,812 | ||||
Service cost |
311 | 259 | ||||||
Interest cost |
142 | 112 | ||||||
Actuarial loss |
243 | 221 | ||||||
Benefits paid |
(26 | ) | (15 | ) | ||||
Benefit obligation at end of year |
$ | 3,059 | $ | 2,389 | ||||
47
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 1,575 | $ | 967 | ||||
Actual return on plan assets |
188 | 284 | ||||||
Employer contribution |
57 | 339 | ||||||
Benefits paid |
(26 | ) | (15 | ) | ||||
Fair value of plan assets at end of year |
$ | 1,794 | $ | 1,575 | ||||
Funded status |
$ | (1,265 | ) | $ | (814 | ) | ||
Unrecognized net actuarial loss |
1,093 | 944 | ||||||
Unrecognized prior service cost |
7 | 9 | ||||||
Prepaid pension cost recognized |
$ | (165 | ) | $ | 139 | |||
Accumulated benefit obligation |
$ | 2,414 | $ | 1,869 | ||||
At December 31, 2010 and 2009, the weighted average assumptions used to determine the benefit obligation are as follows:
Discount rate |
5.50 | % | 6.00 | % | ||||
Rate of compensation increase |
3.00 | % | 3.00 | % |
The components of net periodic pension cost are as follows:
Service cost |
$ | 311 | $ | 260 | ||||
Interest cost |
142 | 112 | ||||||
Expected return on plan assets |
(139 | ) | (116 | ) | ||||
Amortization of prior service costs |
2 | 2 | ||||||
Amortization of loss |
44 | 33 | ||||||
Net periodic pension cost |
$ | 360 | $ | 291 | ||||
At December 31, 2010 and 2009, the weighted average assumptions used to determine net periodic pension cost are as follows:
Discount rate |
6.00 | % | 6.25 | % | ||||
Expected long-term rate of return on plan assets |
8.00 | % | 8.00 | % | ||||
Rate of compensation increase |
3.00 | % | 3.00 | % |
The Companys pension plan asset allocations at December 31, 2010 and 2009, as well as target allocations for 2011 are as follows:
Asset Category | 2011 Target |
12/31/2010 | 12/31/2009 | |||||||||
Equity securities |
75 | % | 59 | % | 63 | % | ||||||
Balanced fund |
20 | % | 31 | % | 32 | % | ||||||
Other |
5 | % | 10 | % | 5 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
The net transition obligation (asset), prior service cost (credit), and estimated net loss (gain) for the plan that are expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are shown in the table below.
2011 | 2010 | |||||||
Expected amortization of transition obligation (asset) |
$ | | $ | | ||||
Expected amortization of prior service cost (credit) |
2 | 2 | ||||||
Expected amortization of net loss (gain) |
66 | 44 |
48
Plan Assets
The pension plans overall investment strategy is to achieve a mix of approximately 75 percent of investments for long-term growth and 25 percent for near-term benefit payments with a wide diversification of asset types, fund strategies, and fund managers. The target allocations for plan assets are 75 percent equity securities, 20 percent corporate bonds and US Treasury securities, and 5 percent to all other types of investments. Equity securities primarily include investments in large-cap and mid-cap companies primarily located in the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities, and U.S. Treasuries. Other types of investments include investments in hedge funds and private equity funds that follow several different strategies.
The fair value of MVBs pension plan assets at December 31, 2010 by asset class are as follows:
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18 - Fair Value Measurements, the Plans assets at fair value as of December 31, 2010.
31-Dec-10 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 179 | $ | | $ | | $ | 179 | ||||||||
Investment in equity securities |
$ | 1,059 | $ | | $ | | $ | 1,059 | ||||||||
Investment in debt |
$ | | $ | 556 | $ | | $ | 556 | ||||||||
Total assets at fair value |
$ | 1,238 | $ | 556 | $ | | $ | 1,794 |
Investment in government and debt securities and short-term investments are valued at the closing price reported on the active market on which the individual securities are traded.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Below we show the best estimate of the plan contribution for next fiscal year. We also show the benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter.
49
Cash Flow | ||||
Contributions for the period of 01/01/11 through 12/31/11 |
$ | 552,981 | ||
Estimated future benefit payments reflecting expected future service |
||||
1/1/2011 through 12/31/2011 |
$ | 67,593 | ||
1/1/2012 through 12/31/2012 |
$ | 111,246 | ||
1/1/2013 through 12/31/2013 |
$ | 122,201 | ||
1/1/2014 through 12/31/2014 |
$ | 131,706 | ||
1/1/2015 through 12/31/2015 |
$ | 152,643 | ||
1/1/2016 through 12/31/2020 |
$ | 1,021,841 |
NOTE 11. INTANGIBLE ASSETS
On October 7, 2005, the Company purchased a full service office in the Charles Town area of Jefferson County West Virginia. This office held assets of $1.8 million and total deposits of $17.1 million. As a result of this transaction, the Company recorded intangible assets. As of December 31, 2010 the Company has allocated $31 to core deposit intangibles, which are being amortized using the double-declining balance method over 10 years. The remaining $896 has been recorded as goodwill, and is evaluated for impairment on October 1st each year by the Company.
NOTE 12. STOCK OFFERING
During 2010 the Company began a confidential offering to accredited investors that resulted in the issuance of 393,305 shares of common stock totaling $8.3 million in additional capital. As of December 31, 2010 the Company had received signed offering memoranda and payment for 82,328 shares totaling 1.7 million in additional capital at December 31, 2010. The proceeds of this offering will be used to support current and long-range growth plans of the Company. During 2010 the Company issued 172,420 shares, concluding 2010 with outstanding shares of 1,802,391. A 10% stock dividend declared December 21, 2010 with a record date of January 25, 2011, payable February 15, 2011 resulted in an additional 159,561 shares.
NOTE 13. STOCK OPTIONS
The MVB Financial Corp. Incentive Stock Plan provides for the issuance of stock options to selected employees. Under the provisions of the plan, the option price per share shall not be less than the fair market value of the common stock on the date of the grant. All options granted prior to 2004 vest in 4 years, and expire 10 years from the date of grant. For options granted in 2004 and 2005 the vesting period has been accelerated to fully vest at December 31, 2005. These options also expire 10 years from the date of the grant. Options granted in 2006, 2007 and 2010 vest in 5 years and expire 10 years from the date of the grant, with the exception of 10,000 shares granted in 2010 that vest in 3 years and expire 10 years from the date of the grant.
50
The following summarizes MVBs stock options as of December 31, and the changes for the year then ended:
2010 | 2009 | |||||||||||||||
Number of Shares |
Weighted- Average Exercise Price |
Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||
Outstanding at beginning of year |
134,658 | $ | 15.83 | 161,007 | $ | 15.05 | ||||||||||
Granted |
99,500 | | | | ||||||||||||
Adjust for 5% stock dividend |
| $ | | | $ | | ||||||||||
Exercised |
(12,859 | ) | | (26,349 | ) | | ||||||||||
Forfeited/expired |
(14,002 | ) | | | | |||||||||||
Outstanding at end of year |
207,297 | $ | 17.88 | 134,658 | $ | 15.83 | ||||||||||
Exercisable at end of year |
115,297 | $ | 16.00 | 124,658 | $ | 15.81 | ||||||||||
Weighted-average fair value of options granted during the year |
$ | 3.10 | N/A | |||||||||||||
The fair value for the options was estimated at the date of grant using a Black-Scholes option-pricing model with an average risk-free interest rate of 3.28% for 2010, and a weighted average expected life of the options of 7 years for 2010. The expected volatility of MVBs stock price used for 2010 options was 1.26% and the expected dividend yield used was .50%.
The following summarizes information concerning MVBs stock options outstanding at December 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price |
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price |
|||||||||||||||||
$ | 16.00 | 115,797 | 6.00 | $ | 16.00 | 115,297 | $ | 16.00 | ||||||||||||||
$ | 20.00 | 81,500 | 10.00 | $ | 20.00 | |||||||||||||||||
$ | 22.50 | 10,000 | 10.00 | $ | 22.50 |
NOTE 14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as defined. As of December 31, 2010 and 2009, the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. Both the Companys and the Banks actual capital amounts and ratios are presented in the table below.
51
ACTUAL | MINIMUM TO BE WELL CAPITALIZED |
MINIMUM FOR CAPITAL ADEQUACY PURPOSES |
||||||||||||||||||||||
AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of December 31, 2010 Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 32,582 | 11.9 | % | N/A | N/A | $ | 21,807 | 8.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 36,275 | 13.3 | % | $ | 27,258 | 10.0 | % | $ | 21,807 | 8.0 | % | ||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 30,104 | 11.0 | % | N/A | N/A | $ | 10,903 | 4.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 33,797 | 12.4 | % | $ | 16,355 | 6.0 | % | $ | 10,903 | 4.0 | % | ||||||||||||
Tier I Capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 30,104 | 7.3 | % | N/A | N/A | $ | 16,487 | 4.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 33,797 | 8.2 | % | $ | 20,590 | 5.0 | % | $ | 16,472 | 4.0 | % | ||||||||||||
As of December 31, 2009 Total Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 28,780 | 11.8 | % | N/A | N/A | $ | 19,440 | 8.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 32,191 | 13.2 | % | $ | 24,300 | 10.0 | % | $ | 19,440 | 8.0 | % | ||||||||||||
Tier I Capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 26,539 | 10.9 | % | N/A | N/A | $ | 9,720 | 4.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 29,950 | 12.3 | % | $ | 14,580 | 6.0 | % | $ | 9,720 | 4.0 | % | ||||||||||||
Tier I Capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 26,539 | 7.6 | % | N/A | N/A | $ | 14,020 | 4.0 | % | ||||||||||||||
Subsidiary Bank |
$ | 29,950 | 8.6 | % | $ | 17,508 | 5.0 | % | $ | 14,007 | 4.0 | % |
NOTE 15. REGULATORY RESTRICTION ON DIVIDEND
The approval of the regulatory agencies is required if the total of all dividends declared by the Bank in any calendar year exceeds the Banks net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years.
52
NOTE 16. LEASES
The Company leases land and building space for the operation of some banking offices. All such leases qualify as operating leases. Following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2010:
(Dollars in thousands) |
||||
Years ended December 31: |
||||
2011 |
$ | 55 | ||
2012 |
55 | |||
2013 |
36 | |||
2014 |
36 | |||
2015 |
36 | |||
Thereafter |
318 | |||
Total minimum payments required: |
$ | 536 | ||
Total lease expense for the years ended December 31, 2010 and 2009 was $54 and $54, respectively.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments.
Short-term financial instruments: The carrying values of short-term financial instruments including cash and due from banks, interest bearing balances - FHLB, and certificates of deposit in other banks approximate the fair value of these instruments.
Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.
Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.
Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their estimated fair values.
Repurchase agreements: The fair values of repurchase agreements approximate their estimated fair values.
Deposits: The estimated fair values of demand deposits (i.e., non interest bearing checking, NOW and money market), savings accounts and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.
Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.
53
The carrying values and estimated fair values of the Companys financial instruments are summarized as follows:
December 31, 2010 | ||||||||
Carrying Value |
Estimated Fair Value |
|||||||
(Dollars in thousands) | ||||||||
Financial assets: |
||||||||
Cash and due from banks |
$ | 3,713 | $ | 3,713 | ||||
Interest bearing balances with banks |
27,825 | 27,878 | ||||||
Securities available-for-sale |
61,824 | 61,824 | ||||||
Securities held-to-maturity |
7,460 | 7,442 | ||||||
Loans |
294,044 | 302,277 | ||||||
Accrued interest receivable |
1,398 | 1,398 | ||||||
$ | 396,264 | $ | 404,532 | |||||
Financial liabilities: |
||||||||
Deposits |
$ | 300,434 | $ | 307,584 | ||||
Repurchase agreements |
47,623 | 47,671 | ||||||
FHLB and other borrowings |
28,614 | 32,305 | ||||||
Accrued interest payable |
378 | 378 | ||||||
Long-term debt |
4,124 | 4,124 | ||||||
$ | 381,173 | $ | 392,062 | |||||
December 31, 2009 | ||||||||
Carrying Value |
Estimated Fair Value |
|||||||
Financial assets: |
||||||||
Cash and due from banks |
$ | 2,321 | $ | 2,321 | ||||
Interest bearing balances with banks |
53,377 | 53,484 | ||||||
Securities available-for-sale |
37,292 | 37,292 | ||||||
Securities held-to-maturity |
6,594 | 6,772 | ||||||
Loans |
232,847 | 233,313 | ||||||
Accrued interest receivable |
1,074 | 1,074 | ||||||
$ | 333,505 | $ | 334,256 | |||||
Financial liabilities: |
||||||||
Deposits |
$ | 264,531 | $ | 263,840 | ||||
Repurchase agreements |
35,641 | 35,712 | ||||||
Federal Home Loan Bank Borrowings |
19,198 | 20,427 | ||||||
Accrued interest payable |
531 | 531 | ||||||
Accrued interest payable |
4,124 | 4,124 | ||||||
Long-term debt |
$ | 324,025 | $ | 324,634 | ||||
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Companys financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.
54
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
NOTE 18. FAIR VALUE MEASUREMENTS
Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.
Accounting standards establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by these standards are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The following table presents the assets and liabilities reported on the consolidated statements of financial condition at their fair value as of December 31, 2010 by level within the fair value hierarchy. As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classified investments in government securities as Level 2 instruments and valued them using the market approach.
December 31, 2010 | ||||||||||||||||
(In Thousands) | Level I | Level II | Level III | Total | ||||||||||||
Assets: |
||||||||||||||||
U.S. Government Agency Securities |
|
35,280 | 35,280 | |||||||||||||
Mortgage backed Securities |
|
26,420 | 26,420 | |||||||||||||
Other Securities |
124 | 124 | ||||||||||||||
Total |
61,824 | 61,824 |
55
NOTE 19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The investment of the Company in its second tier subsidiaries is presented on the equity method of accounting. Information relative to the parent companys balance sheets at December 31, 2010 and 2009, and the related statements of income and cash flows for each of those years are presented below:
December 31 | ||||||||
(Dollars in thousands, except share data) | 2010 | 2009 | ||||||
Balance Sheets Assets |
||||||||
Cash |
$ | 1,779 | $ | 399 | ||||
Investment in bank subsidiary, eliminated in consolidation |
32,733 | 30,548 | ||||||
Other assets |
385 | 319 | ||||||
Total assets |
$ | 34,897 | $ | 31,266 | ||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Other liabilities |
$ | 4 | $ | 4 | ||||
Long-term debt |
4,124 | 4,124 | ||||||
Total liabilities |
4,128 | 4,128 | ||||||
Stockholders equity |
||||||||
Preferred stock, par value $1,000; 5,000 shares authorized, none issued |
$ | | $ | | ||||
Common stock, par value $1; 4,000,000 shares authorized; 1,802,391 and 1,629,971 shares issued respectively |
1,802 | 1,629 | ||||||
Additional paid in capital |
23,864 | 20,457 | ||||||
Common stock paid for but not issued, par value $1; 82,328 shares issued |
1,729 | | ||||||
Treasury stock |
(1,006 | ) | (522 | ) | ||||
Retained earnings |
4,643 | 5,917 | ||||||
Accumulated other comprehensive income |
(263 | ) | (343 | ) | ||||
Total stockholders equity |
30,769 | 27,138 | ||||||
Total liabilities and stockholders equity |
$ | 34,897 | $ | 31,266 | ||||
(Dollars in thousands) | ||||||||
Statements of Income |
2010 | 2009 | ||||||
Income - dividends from bank subsidiary |
$ | | $ | | ||||
Expenses - operating |
176 | 163 | ||||||
Income/(Loss) before income taxes and undistributed income |
(176 | ) | (163 | ) | ||||
Income tax (benefit) |
(67 | ) | (62 | ) | ||||
Income after tax |
(109 | ) | (101 | ) | ||||
Equity in undistributed income of bank subsidiary |
2,346 | 1,507 | ||||||
Net income |
$ | 2,237 | $ | 1,406 | ||||
56
(Dollars in thousands) | ||||||||
Statements of Cash Flows |
2010 | 2009 | ||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 2,237 | $ | 1,406 | ||||
Equity in undistributed income of bank subsidiary |
(2,346 | ) | (1,507 | ) | ||||
(Increase) in other assets |
(66 | ) | (62 | ) | ||||
(Decrease)/increase in other liabilities |
| (3 | ) | |||||
Stock option expense |
46 | 15 | ||||||
Unrealized (loss)/gain |
80 | (28 | ) | |||||
Net cash (used in) operating activities |
(49 | ) | (179 | ) | ||||
INVESTING ACTIVITIES |
||||||||
Investment in subsidiary |
161 | 301 | ||||||
Net cash provided by/(used in) investing activities |
161 | 301 | ||||||
FINANCING ACTIVITIES |
||||||||
Proceeds of stock offering |
1,729 | | ||||||
Proceeds from long-term borrowings |
| | ||||||
Common stock options exercised |
183 | 292 | ||||||
Cash dividend |
(160 | ) | (160 | ) | ||||
Purchase of treasury stock |
(484 | ) | (223 | ) | ||||
Net cash (used in)/provided by financing activities |
1,268 | (91 | ) | |||||
Increase/(decrease) in cash |
1,380 | 31 | ||||||
Cash at beginning of period |
399 | 368 | ||||||
Cash at end of period |
$ | 1,779 | $ | 399 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
MVB Financial Corp.
Fairmont, West Virginia
We have audited the accompanying consolidated balance sheets of MVB Financial Corp. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MVB Financial Corp. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Wheeling, West Virginia
March 1,2011
S.R. Snodgrass, A.C. 980 National Road Wheeling, West Virginia 26003-6400 Phone: (304) 233-5030 Facsimile: (304) 233-3062
58
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No response required
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Companys management, including the Companys President and Chief Executive Officer, along with the Companys Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of December 31, 2010, of the design and operation of the Companys disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, the Companys President and Chief Executive Officer, along with the Companys Principal Accounting Officer concluded that the Companys disclosure controls and procedures were effective as of December 31, 2010.
There have been no material changes in the Companys internal control over financial reporting during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2010. Managements assessment did not identify any material weaknesses in the Companys internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Because there were no material weaknesses discovered, management believes that, as of December 31, 2010, the Companys internal control over financial reporting was effective.
59
This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subjected to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.
Date: March 11, 2011 | /s/ LARRY F. MAZZA | |||
Larry F. Mazza | ||||
President & CEO | ||||
Date: March 11, 2011 | /s/ ERIC L. TICHENOR | |||
Eric L. Tichenor | ||||
Senior Vice President & CFO |
No response required.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers of MVB include those persons identified under Management Nominees to the Board of MVB on pages 3-6 of MVBs definitive Proxy Statement relating to MVBs Annual Meeting of Shareholders for 2011.
ITEM 11. EXECUTIVE COMPENSATION
See Executive Compensation on pages 10-11 of MVBs definitive Proxy Statement relating to MVBs Annual Meeting of Stockholders for 2011.
MVB has adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and other executive officers and shall be deemed incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Principal Holders of Voting Securities on page 13 of MVBs definitive Proxy Statement relating to MVBs Annual Meeting of Shareholders for 2011 which section is expressly incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
MVB and the Bank have, and expect to continue to have, banking and other transactions in the ordinary course of business with its directors and officers and their affiliates, including members of their families or corporations, partnerships or other organizations in which offic