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EX-32.2 - EXHIBIT 32.2 - SOX SECTION 906 CFO CERTIFICATION - MVB FINANCIAL CORPexhibit322-soxsection906cf.htm
EX-32.1 - EXHIBIT 32.1 - SOX SECTION 906 CEO CERTIFICATION - MVB FINANCIAL CORPexhibit321-soxsection906ce.htm
EX-31.2 - EXHIBIT 31.2 - SOX SECTION 302 CFO CERTIFICATION - MVB FINANCIAL CORPexhibit312-soxsection302cf.htm
EX-31.1 - EXHIBIT 31.1 - SOX SECTION 302 CEO CERTIFICATION - MVB FINANCIAL CORPexhibit311-soxsection302ce.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
¨  TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
 
Commission File Number: 000-50567
 
mvbfinanciallogoa24.jpg
 
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)
 
(304) 363-4800
Registrant's telephone number, including area code
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of May 6, 2018, the Registrant had 10,540,827 shares of common stock outstanding with a par value of $1.00 per share.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
 
 
March 31, 2018
 
December 31, 2017
 
 
(Unaudited)
 
(Note 1)
ASSETS
 
 
 
 
Cash and cash equivalents:
 
 
 
 
     Cash and due from banks
 
$
17,088

 
$
16,345

     Interest bearing balances with banks
 
6,542

 
3,960

     Total cash and cash equivalents
 
23,630

 
20,305

Certificates of deposit with other banks
 
14,778

 
14,778

Investment Securities:
 
 
 
 
     Securities available-for-sale
 
226,504

 
231,507

     Equity securities
16,265,000

6,979

 

Loans held for sale
 
51,280

 
66,794

Loans:
 
1,157,173

 
1,105,941

     Less: Allowance for loan losses
 
(10,067
)
 
(9,878
)
     Net Loans
 
1,147,106

 
1,096,063

Premises and equipment
 
26,477

 
26,686

Bank owned life insurance
 
32,885

 
32,666

Accrued interest receivable and other assets
 
33,399

 
27,023

Goodwill
 
18,480

 
18,480

TOTAL ASSETS
 
$
1,581,518

 
$
1,534,302

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
     Noninterest bearing
 
$
142,826

 
$
125,963

     Interest bearing
 
1,011,081

 
1,033,617

     Total deposits
 
1,153,907

 
1,159,580

 
 
 
 
 
Accrued interest payable and other liabilities
 
15,620

 
16,434

Repurchase agreements
 
20,676

 
22,403

FHLB and other borrowings
 
207,370

 
152,169

Subordinated debt
 
33,524

 
33,524

     Total liabilities
 
1,431,097

 
1,384,110

 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock, par value $1,000; 20,000 authorized; 783 issued in 2018 and 2017, respectively (See Footnote 7)
 
7,834

 
7,834

Common stock, par value $1; 20,000,000 shares authorized; 10,589,704 shares issued and 10,538,627 shares outstanding in 2018 and 10,495,704 shares issued and 10,444,627 shares outstanding in 2017
 
10,590

 
10,496

Additional paid-in capital
 
100,108

 
98,698

Retained earnings
 
40,190

 
37,236

Accumulated other comprehensive loss
 
(7,217
)
 
(2,988
)
Treasury stock, 51,077 shares, at cost
 
(1,084
)
 
(1,084
)
     Total stockholders’ equity
 
150,421

 
150,192

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,581,518

 
$
1,534,302


See accompanying notes to unaudited consolidated financial statements.

3


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
 
 
Three Months Ended March 31,
 
 
2018

2017
INTEREST INCOME
 
 
 
 
     Interest and fees on loans
 
$
13,291

 
$
11,882

     Interest on deposits with other banks
 
90

 
79

     Interest on investment securities - taxable
 
895

 
546

     Interest on tax exempt loans and securities
 
778

 
561

     Total interest income
 
15,054

 
13,068

 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
     Interest on deposits
 
2,298

 
1,906

     Interest on repurchase agreements
 
19

 
17

     Interest on FHLB and other borrowings
 
714

 
288

     Interest on subordinated debt
 
558

 
551

     Total interest expense
 
3,589

 
2,762

 
 
 
 
 
NET INTEREST INCOME
 
11,465

 
10,306

     Provision for loan losses
 
474

 
518

     Net interest income after provision for loan losses
 
10,991

 
9,788

 
 
 
 
 
NONINTEREST INCOME
 
 
 
 
     Service charges on deposit accounts
 
185

 
187

     Income on bank owned life insurance
 
218

 
147

     Interchange and debit card transaction fees
 
150

 
295

     Mortgage fee income
 
6,563

 
9,634

     Gain on sale of portfolio loans
 
212

 
9

     Insurance and investment services income
 
164

 
124

     Gain on sale of securities
 
326

 
183

     Gain (loss) on derivatives
 
584

 
(1,947
)
     Commercial swap fee income
 
413

 

     Other operating income
 
224

 
192

     Total noninterest income
 
9,039

 
8,824

 
 
 
 
 
NONINTEREST EXPENSES
 
 
 
 
     Salary and employee benefits
 
10,473

 
9,962

     Occupancy expense
 
1,049

 
994

     Equipment depreciation and maintenance
 
784

 
689

     Data processing and communications
 
835

 
1,214

     Mortgage processing
 
892

 
894

     Marketing, contributions, and sponsorships
 
347

 
327

     Professional fees
 
745

 
677

     Printing, postage, and supplies
 
165

 
217

     Insurance, tax, and assessment expense
 
390

 
461

     Travel, entertainment, dues, and subscriptions
 
648

 
501

     Other operating expenses
 
411

 
381

     Total noninterest expense
 
16,739

 
16,317

Income before income taxes
 
3,291

 
2,295

Income tax expense
 
697

 
721

Net income
 
$
2,594

 
$
1,574

Preferred dividends
 
121

 
129

Net income available to common shareholders
 
$
2,473

 
$
1,445

 
 
 
 
 
Earnings per share - basic
 
$
0.24

 
$
0.14

Earnings per share - diluted
 
$
0.23

 
$
0.14

Cash dividends declared
 
$
0.025

 
$
0.025

Weighted average shares outstanding - basic
 
10,474,138

 
9,996,544

Weighted average shares outstanding - diluted
 
12,714,353

 
10,009,341


See accompanying notes to unaudited consolidated financial statements.

4


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
 
 
Three Months Ended March 31,
 
 
2018

2017
Net Income
 
$
2,594

 
$
1,574

 
 
 
 
 
     Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
     Unrealized holding gains (losses) on securities available-for-sale
 
(4,448
)
 
448

 
 
 
 
 
     Income tax effect
 
1,201

 
(179
)
 
 
 
 
 
     Reclassification adjustment for gain recognized in income
 
(326
)
 
(183
)
 
 
 
 
 
     Income tax effect
 
88

 
73

 
 
 
 
 
     Change in defined benefit pension plan
 

 
164

 
 
 
 
 
     Income tax effect
 

 
(66
)
 
 
 
 
 
Total other comprehensive income (loss)
 
(3,485
)
 
257

 
 
 
 
 
Comprehensive income (loss)
 
$
(891
)
 
$
1,832


See accompanying notes to unaudited consolidated financial statements.


5


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) (Dollars in thousands except per share data)
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Total Stockholders' Equity
Balance December 31, 2016
 
$
16,334

 
$
10,048

 
$
93,412

 
$
31,192

 
$
(4,277
)
 
$
(1,084
)
 
$
145,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 

 

 

 
1,574

 

 

 
1,574

Other comprehensive income
 

 

 

 

 
257

 

 
257

Cash dividends paid ($0.025 per share)
 

 

 

 
(250
)
 

 

 
(250
)
Dividends on preferred stock
 

 

 

 
(129
)
 

 

 
(129
)
Stock based compensation
 

 

 
148

 

 

 

 
148

Redemption of preferred stock
 
(8,500
)
 

 

 

 

 

 
(8,500
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2017
 
$
7,834

 
$
10,048

 
$
93,560

 
$
32,387

 
$
(4,020
)
 
$
(1,084
)
 
$
138,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2017
 
7,834

 
10,496

 
98,698

 
37,236

 
(2,988
)
 
(1,084
)
 
150,192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$

 
$

 
$

 
$
2,594

 
$

 
$

 
$
2,594

Other comprehensive loss
 

 

 

 

 
(3,485
)
 

 
(3,485
)
Cash dividends paid ($0.025 per share)
 

 

 

 
(263
)
 

 

 
(263
)
Dividends on preferred stock
 

 

 

 
(121
)
 

 

 
(121
)
Stock based compensation
 

 

 
244

 

 

 

 
244

Common stock options exercised
 

 
94

 
1,166

 

 

 

 
1,260

Stranded AOCI (See Footnote 2)
 

 

 

 
646

 
(646
)
 

 

Mark to Market on equity positions held at December 31, 2017 (See Footnote 2)
 

 

 

 
98

 
(98
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2018
 
$
7,834

 
$
10,590

 
$
100,108

 
$
40,190

 
$
(7,217
)
 
$
(1,084
)
 
$
150,421


See accompanying notes to unaudited consolidated financial statements.


6


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
 
 
Three Months Ended March 31,

 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
2,594

 
$
1,574

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
     Net amortization and accretion of investments
 
361

 
319

     Net amortization of deferred loan costs
 
16

 
90

     Provision for loan losses
 
474

 
518

     Depreciation and amortization
 
741

 
617

     Stock based compensation
 
244

 
148

     Loans originated for sale
 
(238,935
)
 
(313,263
)
     Proceeds of loans sold
 
261,012

 
341,150

     Mortgage fee income
 
(6,563
)
 
(9,634
)
     Gain on sale of securities
 
(326
)
 
(549
)
     Loss on sale of securities
 

 
366

     Gain on sale of portfolio loans
 
(212
)
 
(9
)
     Income on bank owned life insurance
 
(218
)
 
(147
)
     Deferred taxes
 
(51
)
 
(25
)
     Other, net
 
(3,924
)
 
(1,414
)
     Net cash provided by operating activities
 
15,213

 
19,741

INVESTING ACTIVITIES
 
 
 
 
     Purchases of investment securities available-for-sale
 
(14,859
)
 
(37,919
)
     Maturities/paydowns of investment securities available-for-sale
 
7,364

 
4,717

     Sales of investment securities available-for-sale
 
680

 
22,945

     Purchases of premises and equipment
 
(506
)
 
(1,588
)
     Net increase in loans
 
(51,321
)
 
(24,245
)
     Purchases of restricted bank stock
 
(5,901
)
 
(4,276
)
     Redemptions of restricted bank stock
 
3,797

 
4,818

     Proceeds from sale of other real estate owned
 
181

 

     Purchase of bank owned life insurance
 

 
(50
)
     Net cash used in investing activities
 
(60,565
)
 
(35,598
)
FINANCING ACTIVITIES
 
 
 
 
     Net (decrease) increase in deposits
 
(5,673
)
 
29,449

     Net decrease in repurchase agreements
 
(1,727
)
 
(3,465
)
     Net change in short-term FHLB borrowings
 
67,421

 
(14,769
)
     Principal payments on FHLB borrowings
 
(12,220
)
 
(24
)
     Proceeds from new FHLB borrowings
 

 
14,483

     Preferred stock redemption
 

 
(8,500
)
     Common stock options exercised
 
1,260

 

     Cash dividends paid on common stock
 
(263
)
 
(250
)
     Cash dividends paid on preferred stock
 
(121
)
 
(129
)
     Net cash provided by financing activities
 
48,677

 
16,795

Increase in cash and cash equivalents
 
3,325

 
938

Cash and cash equivalents at beginning of period
 
20,305

 
17,340

Cash and cash equivalents at end of period
 
$
23,630

 
$
18,278

Supplemental disclosure of cash flow information:
 
 
 
 
     Loans transferred to other real estate owned
 
$
720

 
$

Cash payments for:
 
 
 
 
     Interest on deposits, repurchase agreements and borrowings
 
$
3,635

 
$
2,943


See accompanying notes to unaudited consolidated financial statements.

7


Notes to the Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).

Principles of Consolidation and Basis of Presentation

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10‑Q. Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of December 31, 2017 has been derived from audited financial statements included in the Company’s 2017 filing on Form 10-K. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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 those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s December 31, 2017, Form 10-K filed with the Securities and Exchange Commission (the "SEC").

In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.

Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contract-revenue (i.e. gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card processing related costs should change (i.e. costs previously recorded as expense in now recorded as contract-revenue). These classification changes resulted in immaterial changes to both revenue and expense. Since

8


there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts related to the debit and credit card related cost reclassifications discussed above.

Note 2 – Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update requires a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act, which was enacted on December 22, 2017. The Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amendments in the ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which amounted to $646 thousand.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2018, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it is our current policy to amortize premiums of investment securities to the earliest call date.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, IntangiblesGoodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit to address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU 2017-01”) to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 was effective for the Company on January 1, 2018 and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company's project management team and Management Loan Committee ("MLC") engaged a third party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist with implementation that will be tested throughout 2018.

9



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:(1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company established a project management team, which is currently evaluating the impact of the new standard, and expects an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company's Consolidated Financial Statements. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion. See Note 6 "Fair Value of Financial Instruments" of the Notes to Consolidated Financial Statements for further information.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. The Company evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company determined that this standard did not have a material impact on its consolidated financial statements because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards and out of scope of ASC 606 revenue standard. The Company evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company adopted the revenue recognition standard as of January 1, 2018 and it did not have a material effect on the consolidated financial statements. See Note 1 "Summary of Significant Policies" of the Notes to the Consolidated Financial Statements for further information.


10


Note 3 – Investment Securities

There were no held-to-maturity securities at March 31, 2018 or December 31, 2017.

Amortized cost and fair values of investment securities available-for-sale at March 31, 2018 are summarized as follows:
(Dollars in thousands)
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
U. S. Agency securities
 
$
82,518

 
$
91

 
$
(1,814
)
 
$
80,795

U.S. Sponsored Mortgage-backed securities
 
58,827

 

 
(2,509
)
 
56,318

Municipal securities
 
80,839

 
996

 
(1,730
)
 
80,105

Total debt securities
 
222,184

 
1,087

 
(6,053
)
 
217,218

Other securities
 
9,235

 
87

 
(36
)
 
9,286

Total investment securities available-for-sale
 
$
231,419

 
$
1,174

 
$
(6,089
)
 
$
226,504


Amortized cost and fair values of investment securities available-for-sale at December 31, 2017 are summarized as follows:
(Dollars in thousands)
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
U. S. Agency securities
 
$
81,705

 
$
81

 
$
(841
)
 
$
80,945

U.S. Sponsored Mortgage-backed securities
 
59,387

 
31

 
(1,264
)
 
58,154

Municipal securities
 
74,482

 
1,733

 
(373
)
 
75,842

Total debt securities
 
215,574

 
1,845

 
(2,478
)
 
214,941

Equity and other securities
 
15,940

 
644

 
(18
)
 
16,566

Total investment securities available-for-sale
 
$
231,514

 
$
2,489

 
$
(2,496
)
 
$
231,507


The following table summarizes amortized cost and fair values of debt securities by maturity:
 
 
March 31, 2018
 
 
Available for sale
(Dollars in thousands)
 
Amortized Cost
 
Fair Value
Within one year
 
$
524

 
$
528

After one year, but within five
 
46,954

 
46,525

After five years, but within ten
 
23,841

 
22,947

After ten years
 
150,865

 
147,218

Total
 
$
222,184

 
$
217,218


Investment securities with a carrying value of $117.4 million at March 31, 2018, were pledged to secure public funds, repurchase agreements, and potential borrowings at the Federal Reserve discount window.

The Company’s investment portfolio includes securities that are in an unrealized loss position as of March 31, 2018, the details of which are included in the following table. Although these securities, if sold at March 31, 2018 would result in a pretax loss of $6.1 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. Management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis. Declines in the fair 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 Company’s 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 March 31, 2018, 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 fair value.


11


The following table discloses investments in an unrealized loss position at March 31, 2018:
(Dollars in thousands)
 
Less than 12 months
 
12 months or more
Description and number of positions
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (45)
 
$
62,984

 
$
(1,471
)
 
$
7,789

 
$
(343
)
U.S. Sponsored Mortgage-backed securities (42)
 
19,632

 
(541
)
 
39,196

 
(1,968
)
Municipal securities (86)
 
28,748

 
(827
)
 
18,100

 
(903
)
Other securities (3)
 
$
2,549

 
$
(36
)
 
$

 
$

 
 
$
113,913

 
$
(2,875
)
 
$
65,085

 
$
(3,214
)

The following table discloses investments in an unrealized loss position at December 31, 2017:
(Dollars in thousands)
 
Less than 12 months
 
12 months or more
Description and number of positions
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (45)
 
$
61,834

 
$
(659
)
 
$
7,709

 
$
(182
)
U.S. Sponsored Mortgage-backed securities (39)
 
16,825

 
(159
)
 
37,427

 
(1,105
)
Municipal securities (47)
 
8,826

 
(48
)
 
16,781

 
(325
)
Equity and other securities (2)
 
1,034

 
(18
)
 

 

 
 
$
88,519

 
$
(884
)
 
$
61,917

 
$
(1,612
)

For the three month periods ended March 31, 2018 and 2017, the Company sold investments available-for-sale of $680 thousand, $22.9 million, respectively. These sales resulted in gross gains of $326 thousand and $549 thousand and gross losses of $0 and $366 thousand, respectively.

For the three months ended March 31, 2018, the Company recognized an unrealized loss of $30 thousand on equity securities held as of March 31, 2018, which was recorded in noninterest income in the consolidated statements of income.

Note 4 – Loans and Allowance for Loan Losses

The components of loans in the Consolidated Balance Sheet at March 31, 2018 and December 31, 2017, were as follows:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Commercial and Non-Residential Real Estate
 
$
824,625

 
$
783,909

Residential Real Estate
 
260,513

 
246,214

Home Equity
 
59,526

 
62,400

Consumer
 
11,909

 
12,783

Total Loans
 
$
1,156,573

 
$
1,105,306

Deferred loan origination fees and costs, net
 
600

 
635

Loans receivable
 
$
1,157,173

 
$
1,105,941


All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan.

An allowance for loan losses ("ALL") is maintained to absorb losses from the loan portfolio. The ALL is based on management’s 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 Bank’s 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 Bank’s ALL. The Bank's methodology allows for the analysis of certain impaired loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit, and consumer loans, when considered impaired, are

12


evaluated collectively for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans. Total collectively evaluated impaired loans were $1.4 million and $1.3 million, while the related reserves were $173 thousand and $169 thousand as of March 31, 2018 and December 31, 2017.

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 qualified factors.

The segments described below in the impaired loans by class table, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and bank 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. All 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.

Company and Bank management have 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: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews, audits, and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions consumer sentiment, and other external factors. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.

To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-revolving lines of credit, and revolving lines of credit, and based its calculation on the expectation of future advances of each loan category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition, many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.

Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which Management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. As of March 31, 2018 and December 31, 2017, the liability for unfunded commitments related to loans held for investment was $284 thousand.

Bank 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.

The ALL 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.


13


The following tables summarize 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 March 31, 2018:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
ALL balance at December 31, 2017
 
$
7,804

 
$
1,119

 
$
705

 
$
250

 
$
9,878

     Charge-offs
 
(324
)
 
(11
)
 

 
(21
)
 
(356
)
     Recoveries
 
2

 
9

 
56

 
4

 
71

     Provision
 
516

 
60

 
(68
)
 
(34
)
 
474

ALL balance at March 31, 2018
 
$
7,998

 
$
1,177

 
$
693

 
$
199

 
$
10,067

Individually evaluated for impairment
 
$
915

 
$

 
$

 
$

 
$
915

Collectively evaluated for impairment
 
$
7,083

 
$
1,177

 
$
693

 
$
199

 
$
9,152


The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2018:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
     Individually evaluated for impairment
 
$
12,957

 
$
1,707

 
$
44

 
$
43

 
$
14,751

     Collectively evaluated for impairment
 
811,668

 
258,806

 
59,482

 
11,866

 
1,141,822

Total Loans
 
$
824,625

 
$
260,513

 
$
59,526

 
$
11,909

 
$
1,156,573


The following tables summarize 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 March 31, 2017:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
ALL balance at December 31, 2016
 
$
7,181

 
$
990

 
$
728

 
$
202

 
$
9,101

     Charge-offs
 
(113
)
 
(141
)
 
(33
)
 
(3
)
 
(290
)
     Recoveries
 
9

 
32

 
1

 
1

 
43

     Provision
 
208

 
204

 
94

 
12

 
518

ALL balance at March 31, 2017
 
$
7,285

 
$
1,085

 
$
790

 
$
212

 
$
9,372

Individually evaluated for impairment
 
$
279

 
$
46

 
$
36

 
$
25

 
$
386

Collectively evaluated for impairment
 
$
7,006

 
$
1,039

 
$
754

 
$
187

 
$
8,986


The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2017:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
     Individually evaluated for impairment
 
$
10,300

 
$
1,356

 
$
647

 
$
125

 
$
12,428

     Collectively evaluated for impairment
 
742,031

 
243,250

 
64,523

 
13,636

 
1,063,440

Total Loans
 
$
752,331

 
$
244,606

 
$
65,170

 
$
13,761

 
$
1,075,868


Loans are considered to be impaired when, based on 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 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 borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company evaluates residential mortgage loans, home equity lines of credit, and consumer loans in homogeneous pools, rather than on an individual basis, when each of those loans are below specific thresholds based on outstanding principal balance. Such loans that individually exceed these thresholds are evaluated individually for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow Management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.


14


Once the determination has been made that a loan is impaired, the amount of the impairment is measured using one of three valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s 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 March 31, 2018 and December 31, 2017:
 
 
Impaired Loans with Specific Allowance
 
Impaired Loans with No Specific Allowance
 
Total Impaired Loans
(Dollars in thousands)
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Recorded Investment
 
Unpaid Principal Balance
March 31, 2018
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
139

 
$
76

 
$
4,738

 
$
4,877

 
$
4,898

     Commercial Real Estate
 
4,026

 
839

 
2,762

 
6,788

 
7,596

     Acquisition & Development
 

 

 
1,292

 
1,292

 
3,572

          Total Commercial
 
4,165

 
915

 
8,792

 
12,957

 
16,066

Residential
 

 

 
1,707

 
1,707

 
1,755

Home Equity
 

 

 
44

 
44

 
44

Consumer
 

 

 
43

 
43

 
49

          Total Impaired Loans
 
$
4,165

 
$
915

 
$
10,586

 
$
14,751

 
$
17,914

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
3,283

 
$
22

 
$
979

 
$
4,262

 
$
4,275

     Commercial Real Estate
 
4,603

 
1,150

 
2,814

 
7,417

 
7,921

     Acquisition & Development
 

 

 
2,117

 
2,117

 
4,090

          Total Commercial
 
7,886

 
1,172

 
5,910

 
13,796

 
16,286

Residential
 

 

 
1,569

 
1,569

 
1,601

Home Equity
 

 

 
13

 
13

 
13

Consumer
 
69

 
16

 
109

 
178

 
475

          Total Impaired Loans
 
$
7,955

 
$
1,188

 
$
7,601

 
$
15,556

 
$
18,375


Impaired loans have decreased by $805 thousand, or 5.2%, during the first quarter of 2018. This change is the net effect of multiple factors, including the identification of $1.0 million of impaired loans, principal curtailments of $307 thousand, partial charge-offs of $335 thousand, the foreclosure of a commercial development loan which required the reclassification of $720 thousand to other real estate owned, the classification of $292 thousand to performing loans based on improved repayment performance, and normal loan amortization.


15


The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(Dollars in thousands)
 
Average Investment in Impaired Loans
 
Interest Income Recognized on Accrual Basis
 
Interest Income Recognized on Cash Basis
 
Average Investment in Impaired Loans
 
Interest Income Recognized on Accrual Basis
 
Interest Income Recognized on Cash Basis
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
  Commercial Business
 
$
4,525

 
$
38

 
$
53

 
$
3,349

 
$
39

 
$
13

  Commercial Real Estate
 
7,431

 
21

 
23

 
2,803

 
25

 
26

  Acquisition & Development
 
1,837

 

 

 
3,775

 
2

 
3

    Total Commercial
 
13,793

 
59

 
76

 
9,927

 
66

 
42

Residential
 
1,747

 
5

 
48

 
1,417

 
2

 
17

Home Equity
 
65

 

 

 
653

 

 

Consumer
 
132

 

 

 
142

 

 

Total
 
$
15,737

 
$
64

 
$
124

 
$
12,139

 
$
68

 
$
59


As of March 31, 2018, the Bank's other real estate owned balance totaled $1.9 million. The Bank held nine foreclosed residential real estate properties representing $890 thousand, or 47%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two commercial loan relationships, one of which included three properties for a total of $395 thousand, while the other also included three properties for a total of $178 thousand. The three remaining residential real estate properties, totaling $317 thousand, were result of the foreclosure of three unrelated borrowers. The remaining $1.0 million, or 53%, of other real estate owned is the result of the foreclosure of three unrelated commercial development loans. There are two additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $329 thousand as of March 31, 2018. These loans are included in the table above and have $0 in specific allowance allocated to them.

Bank 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. Any portion of a loan that has been or is expected to be 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 past due status, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s 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 ensures that a review of all commercial relationships of one million dollars or greater is performed annually.

Review of the appropriate risk grade is included in both the internal and external loan review process, and 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 independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Bank’s 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.


16


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 March 31, 2018 and December 31, 2017:
(Dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
380,106

 
$
4,793

 
$
4,547

 
$

 
$
389,446

     Commercial Real Estate
 
304,669

 
14,553

 
2,394

 
4,236

 
325,852

     Acquisition & Development
 
105,111

 
994

 
2,230

 
992

 
109,327

          Total Commercial
 
789,886

 
20,340

 
9,171

 
5,228

 
824,625

Residential
 
257,307

 
2,879

 
205

 
122

 
260,513

Home Equity
 
58,413

 
1,074

 
39

 

 
59,526

Consumer
 
11,695

 
191

 
16

 
7

 
11,909

          Total Loans
 
$
1,117,301

 
$
24,484

 
$
9,431

 
$
5,357

 
$
1,156,573

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
371,041

 
$
4,816

 
$
4,506

 
$

 
$
380,363

     Commercial Real Estate
 
271,751

 
22,995

 
5,961

 
1,149

 
301,856

     Acquisition & Development
 
96,712

 
931

 
2,230

 
1,817

 
101,690

          Total Commercial
 
739,504

 
28,742

 
12,697

 
2,966

 
783,909

Residential
 
242,823

 
3,036

 
223

 
132

 
246,214

Home Equity
 
61,037

 
1,311

 
52

 

 
62,400

Consumer
 
12,453

 
174

 
25

 
131

 
12,783

          Total Loans
 
$
1,055,817

 
$
33,263

 
$
12,997

 
$
3,229

 
$
1,105,306


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.

A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and or the MLC, as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless Management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires a six-month recent history of payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and or MLC.

Management is currently monitoring the payment performance of a $3.2 million commercial loan that has paid slow in recent months. This loan is classified as a troubled debt restructured loan based on multiple interest only periods being provided in the past, however, as of March 31, 2018, this loan was paid current. The borrower has continued to work through ongoing litigation, resolution of which is expected in the near future.


17


The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2018 and December 31, 2017:
(Dollars in thousands)
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total Past Due
 
Total Loans
 
Non-Accrual
 
90+ Days Still Accruing
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
387,428

 
$
473

 
$
393

 
$
1,152

 
$
2,018

 
$
389,446

 
$
1,758

 
$

     Commercial Real Estate
 
321,198

 
1,188

 

 
3,466

 
4,654

 
325,852

 
4,664

 

     Acquisition & Development
 
108,035

 
860

 

 
432

 
1,292

 
109,327

 
1,292

 

          Total Commercial
 
816,661

 
2,521

 
393

 
5,050

 
7,964

 
824,625

 
7,714

 

Residential
 
255,659

 
4,417

 
108

 
329

 
4,854

 
260,513

 
1,301

 

Home Equity
 
59,050

 
194

 
282

 

 
476

 
59,526

 
44

 

Consumer
 
11,831

 
28

 
19

 
31

 
78

 
11,909

 
43

 

          Total Loans
 
$
1,143,201

 
$
7,160

 
$
802

 
$
5,410

 
$
13,372

 
$
1,156,573

 
$
9,102

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
377,901

 
$
512

 
$
1,368

 
$
582

 
$
2,462

 
$
380,363

 
$
1,027

 
$

     Commercial Real Estate
 
300,282

 
45

 
1,149

 
380

 
1,574

 
301,856

 
5,206

 

     Acquisition & Development
 
99,573

 

 
874

 
1,243

 
2,117

 
101,690

 
2,117

 

          Total Commercial
 
777,756

 
557

 
3,391

 
2,205

 
6,153

 
783,909

 
8,350

 

Residential
 
243,177

 
1,879

 
707

 
451

 
3,037

 
246,214

 
1,157

 

Home Equity
 
61,907

 
240

 
240

 
13

 
493

 
62,400

 
13

 

Consumer
 
12,634

 
11

 

 
138

 
149

 
12,783

 
179

 

          Total Loans
 
$
1,095,474

 
$
2,687

 
$
4,338

 
$
2,807

 
$
9,832

 
$
1,105,306

 
$
9,699

 
$


Troubled Debt Restructurings

The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. At March 31, 2018 and December 31, 2017, the Bank had specific reserve allocations for TDR’s of $443 thousand and $439 thousand, respectively.

Loans considered to be troubled debt restructured loans totaled $6.4 million and $6.4 million as of March 31, 2018 and December 31, 2017, respectively. Of these totals, $5.6 million and $5.9 million, respectively, represent accruing troubled debt restructured loans and represent 38% and 38%, respectively of total impaired loans. Meanwhile, $432 thousand represents two loans to one borrower that have defaulted under the restructured terms. Both loans are commercial acquisition and development loans that were considered TDR's due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of March 31, 2018 and December 31, 2017. There were no previously restructured loans that defaulted during the three months ended March 31, 2018.

A commercial loan in the amount of $128 thousand was classified as impaired and as a TDR in the first quarter of 2018. This loan represents the only new TDR for the three months ended March 31, 2018. There were no new TDR's for the three months ended March 31, 2017.


18


 
 
New TDR's 1
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(Dollars in thousands)
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
1

 
$
128

 
$
128

 

 
$

 
$

     Commercial Real Estate
 

 

 

 

 

 

     Acquisition & Development
 

 

 

 

 

 

          Total Commercial
 
1

 
128

 
128

 

 

 

Residential
 

 

 

 

 

 

Home Equity
 

 

 

 

 

 

Consumer
 

 

 

 

 

 

          Total
 
1

 
$
128

 
$
128

 

 
$

 
$


1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.


19


Note 5 – Borrowed Funds

Short-term borrowings

Along with traditional deposits, the Bank has access to short-term borrowings from FHLB to fund its operations and investments. Short-term borrowings from FHLB totaled $204.8 million at March 31, 2018, compared to $149.6 million at December 31, 2017.

Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Balance at end of period
 
$
204,817

 
$
149,596

Average balance during the period
 
148,752

 
100,969

Maximum month-end balance
 
204,816

 
220,097

Weighted-average rate during the year
 
1.64
%
 
1.16
%
Weighted-average rate at end of period
 
1.87
%
 
1.61
%

Repurchase agreements

Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase “repurchase agreements” with customers represent funds deposited by customers, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with customers are included in borrowings section on the consolidated balance sheets. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Company and the client and are accounted for as secured borrowings. The Company's repurchase agreements reflected in liabilities consist of customer accounts and securities which are pledged on an individual security basis.

The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the amount of cash received in connection with the transaction and included in Securities sold under agreements to repurchase on the consolidated balance sheets. The primary risk with the Company's repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

All of the Company’s repurchase agreements were overnight agreements at March 31, 2018 and December 31, 2017. These borrowings were collateralized with investment securities with a carrying value of $21.3 million and $23.1 million at March 31, 2018 and December 31, 2017, respectively, and were comprised of U.S. Government Agencies and Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.

Repurchase agreements totaled $20.7 million at March 31, 2018, compared to $22.4 million in December 31, 2017.
Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Balance at end of period
 
$
20,676

 
$
22,403

Average balance during the period
 
20,605

 
25,160

Maximum month-end balance
 
20,676

 
25,972

Weighted-average rate during the year
 
0.37
%
 
0.30
%
Weighted-average rate at end of period
 
0.39
%
 
0.34
%

Long-term notes from the FHLB were as follows:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Fixed interest rate notes, originating between October 2006 and April 2007, due between October 2021 and April 2022, interest of between 5.18% and 5.20% payable monthly
 
$
1,784

 
$
1,798

Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly installments of $5 thousand, including interest of 5.22%
 
769

 
775

 
 
$
2,553

 
$
2,573



20


Subordinated Debt
Information related to subordinated debt is summarized as follows:
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
Balance at end of period
 
$
33,524

 
$
33,524

Average balance during the period
 
33,524

 
33,524

Maximum month-end balance
 
33,524

 
33,524

Weighted-average rate during the year
 
6.66
%
 
6.69
%
Weighted-average rate at end of period
 
6.77
%
 
6.70
%

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 Company’s Tier 1 capital.

The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012. 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 obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations with respect to the trust preferred securities to the extent set forth in the related guarantees.

On June 30, 2014, the Company issued its Convertible Subordinated Promissory Notes Due 2024 (the “Notes”) to various investors in the aggregate principal amount of $29,400,000. The Notes were issued in $100,000 increments per Note subject to a minimum investment of $1,000,000. The Notes expire 10 years after the initial issuance date of the Notes (the “Maturity Date”).

Interest on the Notes accrues on the unpaid principal amount of each Note (paid quarterly in arrears on January 1, April 1, July 1, and October 1 of each year) which rate shall be dependent upon the principal invested in the Notes and the holder’s ownership of common stock in the Company. For investments of less than $3,000,000 in Notes, an ownership of Company common stock representing at least 30% of the principal of the Notes acquired, the interest rate on the Notes is 7% per annum. For investments of $3,000,000 or greater in Notes and ownership of the Company’s common stock representing at least 30% of the principal of the Notes acquired, the interest rate on the Notes is 7.5% per annum. For investments of $10,000,000 or greater, the interest rate on the Notes is 7% per annum, regardless of whether the holder owns or acquires MVB common stock. The principal on the Notes shall be paid in full at the Maturity Date. On the fifth anniversary of the issuance of the Notes, a holder may elect to continue to receive the stated fixed rate on the Notes or a floating rate determined by LIBOR plus 5% up to a maximum rate of 9%, adjusted quarterly.

The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors of the Federal Reserve System, the Company may, after the Notes have been outstanding for five years, and without premium or penalty, prepay all or a portion of the unpaid principal amount of any Note together with the unpaid interest accrued on such portion of the principal amount of such Note. All such prepayments shall be made pro rata among the holders of all outstanding Notes.

At the election of a holder, any or all of the Notes may be converted into shares of common stock during the 30-day period after the first, second, third, fourth, and fifth anniversaries of the issuance of the Notes or upon a notice to prepay by the Company. On December 28, 2017, the Company distributed notices to the holders of the Notes that provide that the Company has elected to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 1, 2019, which is the final conversion date for the Notes. The Notes will convert into common stock based on $16 per share of the Company’s common stock. The conversion price will be subject to anti-dilution adjustments for certain events such as stock splits, reclassifications, non-cash distributions, extraordinary cash dividends, pro rata repurchases of common stock, and business combination transactions. The Company must give 20 days’ notice to the holders of the Company’s intent to prepay the Notes, so that holders may execute the conversion right set forth above if a holder so desires.

Repayment of the Notes is subordinated to the Company’s outstanding senior debt including (if any) without limitation, senior secured loans. No payment will be made by the Company, directly or indirectly, on the Notes, unless and until all of the senior debt then due has been paid in full. Notwithstanding the foregoing, so long as there exists no event of default under any senior debt, the Company

21


would make, and a holder would receive and retain for the holder’s account, regularly scheduled payments of accrued interest and principal pursuant to the terms of the Notes.

The Company must obtain a consent of the holders of the Notes prior to issuing any new senior debt in excess of $15,000,000 after the date of issuance of the Notes and prior to the Maturity Date.

An event of default will occur upon the Company’s bankruptcy or any failure to pay interest, principal, or other amounts owing on the Notes when due. Upon the occurrence and during the continuance of an event of default (but subject to the subordination provisions of the Notes) the holders of a majority of the outstanding principal amount of the Notes may declare all or any portion of the outstanding principal amount of the Notes due and payable and demand immediate payment of such amount.

The Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed on any interest payment date after a date five years from the original issue date.

The Company reflects subordinated debt in the amount of $33.5 million and $33.5 million as of March 31, 2018 and December 31, 2017 and interest expense of $558 thousand and $551 thousand for the three months ended March 31, 2018 and 2017.

A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
Year
 
Amount
2018
 
204,877

2019
 
85

2020
 
90

2021
 
886

2022
 
1,431

Thereafter
 
33,524

 
 
$
240,894


Note 6 – Fair Value of Financial Instruments

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 management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The methods of determining the fair value of assets and liabilities presented in this footnote are consistent with our methodologies disclosed in Note 17, "Fair Value of Financial Instruments" and Note 18, "Fair Value Measurement" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company's 2017 Annual Report on Form 10-K, except for the valuation of loans held for investment which was impact by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment is estimated using a discounted cash flow analysis. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.

22



Assets Measured on a Recurring Basis

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 II instruments and valued them using the market approach. The following measurements are made on a recurring basis.

Available-for-sale investment securities Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds, and corporate debt securities. There have been no changes in valuation techniques for the three months ended March 31, 2018. Valuation techniques are consistent with techniques used in prior periods.

Loans held for sale The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.

Interest rate lock commitment The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.

Mortgage-backed security hedges MBS hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.

Interest rate cap The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard market volatility.

Interest rate swap Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.


23


The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2018 and December 31, 2017 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
 
March 31, 2018
(Dollars in thousands)
 
Level I
 
Level II
 
Level III
 
Total
Assets:
 
 

 
 

 
 

 
 

     U.S. Government Agency securities
 
$

 
$
80,795

 
$

 
$
80,795

     U.S. Sponsored Mortgage backed securities
 

 
56,318

 

 
56,318

     Municipal securities
 

 
57,534

 
22,571

 
80,105

     Other securities
 

 
9,286

 

 
9,286

     Equity securities
 
6,079

 

 
900

 
6,979

     Loans held for sale
 

 
51,280

 

 
51,280

     Interest rate lock commitment
 

 

 
2,312

 
2,312

     Interest rate swap
 

 
765

 

 
765

     Interest rate cap
 

 
103

 

 
103

Liabilities:
 
 

 
 
 
 

 
 

     Interest rate swap
 

 
765

 

 
765

     Mortgage-backed security hedges
 

 
114

 

 
114

 
 
December 31, 2017
(Dollars in thousands)
 
Level I
 
Level II
 
Level III
 
Total
Assets:
 
 

 
 

 
 

 
 

     U.S. Government Agency securities
 
$

 
$
80,945

 
$

 
$
80,945

     U.S. Sponsored Mortgage backed securities
 

 
58,154

 

 
58,154

     Municipal securities
 

 
52,933

 
22,909

 
75,842

     Equity securities
 
1,607

 
14,959

 

 
16,566

     Loans held for sale
 

 
66,794

 

 
66,794

     Interest rate lock commitment
 

 

 
1,426

 
1,426

     Interest rate swap
 

 
268

 

 
268

     Interest rate cap
 

 
33

 

 
33

Liabilities:
 
 

 
 

 
 

 
 

     Interest rate swap
 

 
268

 

 
268

     Mortgage-backed security hedges
 

 
78

 

 
78


The following table represents recurring level III assets:
(Dollars in thousands)
 
Interest Rate Lock Commitments
 
Municipal Securities
 
Total
Balance at December 31, 2017
 
$
1,426

 
$
22,909

 
$
24,335

Realized and unrealized gains included in earnings
 
886

 

 
886

Unrealized loss included in other comprehensive income (loss)
 

 
(338
)
 
(338
)
Balance at March 31, 2018
 
$
2,312

 
$
22,571

 
$
24,883

 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
1,546

 
$
6,135

 
$
7,681

Realized and unrealized gains included in earnings
 
1,309

 

 
1,309

Unrealized gain included in other comprehensive income (loss)
 

 
54

 
54

Balance at March 31, 2017
 
$
2,855

 
$
6,189

 
$
9,044



24


Assets Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets, and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during 2018 and 2017 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.

Impaired loans Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Other real estate owned Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.

Assets measured at fair value on a nonrecurring basis as of March 31, 2018 and December 31, 2017 are included in the table below:
 
 
March 31, 2018
(Dollars in thousands)
 
Level I
 
Level II
 
Level III
 
Total
Impaired loans
 
$

 
$

 
$
13,836

 
$
13,836

Other real estate owned
 

 

 
1,910

 
1,910

 
 
December 31, 2017
(Dollars in thousands)
 
Level I
 
Level II
 
Level III
 
Total
Impaired loans
 
$

 
$

 
$
14,368

 
$
14,368

Other real estate owned
 

 

 
1,346

 
1,346



25


The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at March 31, 2018 and December 31, 2017.
 
 
Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
 Range
March 31, 2018
 
 
 
 
 
 
 
 
Nonrecurring measurements:
 
 
 
 
 
 
 
 
Impaired loans
 
$
13,836

 
Appraisal of collateral 1
 
Appraisal adjustments 2
 
20% - 62%
 
 
 

 
 
 
Liquidation expense 3
 
5% - 10%
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
1,910

 
Appraisal of collateral 1
 
Appraisal adjustments 2
 
20% - 30%
 
 
 

 
 
 
Liquidation expense 3
 
5% - 10%
 
 
 
 
 
 
 
 
 
Recurring measurements:
 
 
 
 
 
 
 
 
Municipal securities
 
$
22,571

 
Appraisal of bond 3
 
Bond appraisal adjustment 4
 
5% - 15%
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$
2,312

 
Pricing model
 
Pull through rates
 
80% - 83%
 
 
Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
 Range
December 31, 2017
 
 
 
 
 
 
 
 
Nonrecurring measurements:
 
 
 
 
 
 
 
 
Impaired loans
 
$
14,368

 
Appraisal of collateral 1
 
Appraisal adjustments 2
 
20% - 62%
 
 
 

 
 
 
Liquidation expense 3
 
5% - 10%
 
 
 
 
 
 
 
 
 
Other real estate owned
 
$
1,346

 
Appraisal of collateral 1
 
Appraisal adjustments 2
 
20% - 30%
 
 
 

 
 
 
Liquidation expense 3
 
5% - 10%
 
 
 
 
 
 
 
 
 
Recurring measurements:
 
 
 
 
 
 
 
 
Municipal securities
 
$
22,909

 
Appraisal of bond 3
 
Bond appraisal adjustment 4
 
5% - 15%
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$
1,426

 
Pricing model
 
Pull through rates
 
73% - 85%

1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

2 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

3 Fair value determined through independent analysis of liquidity, rating, yield and duration.

4 Appraisals may be adjusted for qualitative factors such as local economic conditions.

Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.

Cash and cash equivalents: –The carrying amounts for cash and cash equivalents approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

Certificates of deposits – The fair values for certificates of deposits are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for certificates of deposits with similar terms of investors. No prepayments of principal are assumed.

26



Securities – U.S. treasury, government agency, mortgage-backed securities, certain municipal securities, and corporate bonds are generally measured at fair value using a third-party pricing service or recent comparable market transactions in similar or identical securities and are classified as Level II instruments. Equity securities are measured at fair value using observable closing prices and are classified as Level I instruments if they are traded on a heavily active market and as Level II instruments if the observable closing price is from a less than active market. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments.

Loans held for sale – Loans held for sale are reported at fair value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on committed market rates or the price secondary markets are currently offering for similar loans using observable market data. (Level II)

Loans – The 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. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company's exit price or the price at which these instruments would be sold or transferred.

Mortgage servicing rights – The carrying value of mortgage servicing rights approximates their fair value due to the immateriality of the balance.

Interest rate lock commitment – For mortgage interest rate locks, the fair value is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis less (iii) expected costs to deliver the interest rate locks, any expected “pull through rate” is multiplied by this calculation to estimate the derivative value.

Mortgage-backed security hedges – MBS hedges are used to mitigate interest rate risk for residential mortgage loans held for sale and interest rate locks and manage expected funding percentages. These instruments are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed securities.

Interest rate cap – The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard market volatility.

Interest rate swap – Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

Accrued interest receivable and payable and repurchase agreements – The carrying values of accrued interest receivable and payable approximate their fair values.

Deposits – The fair values of demand deposits (i.e., noninterest 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.

FHLB and other borrowings – The 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.

Subordinated debt – The fair values for debt are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for debt with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

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.

27



The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows:

Fair Value Measurements at:
(Dollars in thousands)
 
Carrying Value
 
Estimated Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level I)
 
Significant Other Observable Inputs (Level II)
 
Significant Unobservable Inputs (Level III)
March 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 

 
 

 
 

 
 

 
 

     Cash and cash equivalents
 
$
23,630

 
$
23,630

 
$
23,630

 
$

 
$

     Certificates of deposits with other banks
 
14,778

 
14,695

 

 
14,695

 

     Securities available-for-sale
 
226,504

 
226,504

 

 
203,933

 
22,571

     Equity securities
 
6,979

 
6,979

 
6,079

 

 
900

     Loans held for sale
 
51,280

 
51,280

 

 
51,280

 

     Loans, net
 
1,147,106

 
1,137,716

 

 

 
1,137,716

     Mortgage servicing rights
 
179

 
179

 

 

 
179

     Interest rate lock commitment
 
2,312

 
2,312

 

 

 
2,312

     Interest rate swap
 
765

 
765

 

 
765

 

     Interest rate cap
 
103

 
103

 

 
103

 

     Accrued interest receivable
 
5,915

 
5,915

 

 
1,644

 
4,271

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

 
 

     Deposits
 
$
1,153,907

 
$
1,114,189

 
$

 
$
1,114,189

 
$

     Repurchase agreements
 
20,676

 
20,676

 

 
20,676

 

     FHLB and other borrowings
 
207,370

 
207,372

 

 
207,372

 

     Mortgage-backed security hedges
 
114

 
114

 

 
114

 

     Interest rate swap
 
765

 
765

 

 
765

 

     Accrued interest payable
 
908

 
908

 

 
908

 

     Subordinated debt
 
33,524

 
35,117

 

 
35,117

 

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 

 
 

 
 

 
 

 
 

     Cash and cash equivalents
 
$
20,305

 
$
20,305

 
$
20,305

 
$

 
$

     Certificates of deposits with other banks
 
14,778

 
14,985

 

 
14,695

 

     Securities available-for-sale
 
231,507

 
231,507

 
1,607

 
206,991

 
22,909

     Loans held for sale
 
66,794

 
66,794

 

 
66,794

 

     Loans, net
 
1,096,063

 
1,093,824

 

 

 
1,093,824

     Mortgage servicing rights
 
182

 
182

 

 

 
182

     Interest rate lock commitment
 
1,426

 
1,426

 

 

 
1,426

     Interest rate swap
 
268

 
268

 

 
268

 

     Interest rate cap
 
33

 
33

 

 
33

 

     Accrued interest receivable
 
5,296

 
5,296

 

 
1,241

 
4,055

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
     Deposits
 
$
1,159,580

 
$
1,126,615

 
$

 
$
1,126,615

 
$

     Repurchase agreements
 
22,403

 
22,403

 

 
22,403

 

     FHLB and other borrowings
 
152,169

 
152,190

 

 
152,190

 

     Mortgage-backed security hedges
 
78

 
78

 

 
78

 

     Interest rate swap
 
268

 
268

 

 
268

 

     Accrued interest payable
 
643

 
643

 

 
643

 

     Subordinated debt
 
33,524

 
35,117

 

 
35,117

 


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 Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s 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. These estimates are subjective in nature and involve uncertainties and matters of

28


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 7 – Stock Offerings

On March 13, 2017, the Company entered into an Investment Agreement (the “Investment Agreement”) with its Chief Executive Officer, Larry F. Mazza (“Mazza”). Pursuant to the Investment Agreement, Mazza committed to subscribe for and purchase, at the Subscription Price, upon expiration of the Rights Offering, the number of shares of the Company’s common stock, if any, equal to the amount by which 100,000 exceeds the number of shares purchased by Mazza in the Rights Offering. Pursuant to the Investment Agreement, Mazza agreed not to sell or otherwise transfer any shares acquired in connection with the Investment Agreement for a period of six months following the closing of the Rights Offering.

Larry F. Mazza purchased 100,000 shares of the Company's common stock: 90,999 under the rights offering and 9,001 shares under the Investment Agreement.

On March 13, 2017, the Company filed with the SEC a prospectus supplement and accompanying base prospectus (collectively, the “Prospectus”) relating to the commencement of the Company’s rights offering (the “Rights Offering”), pursuant to which the Company distributed, at no charge, non-transferable subscription rights to the holders of its common stock as of 5:00 p.m., Eastern time, on March 10, 2017. The subscription rights were exercisable for up to a total of 434,783 shares of the Company’s common stock, subject to such terms and conditions as further described in the Prospectus.

On April 20, 2017, the Company announced the completion of the rights offering, which expired at 5:00 p.m. Eastern time on April 14, 2017. All 434,783 shares offered in the rights offering were subscribed for, resulting in new capital of approximately $5.0 million. Computershare, who served as subscription agent, completed its review and tabulation of subscriptions on April 19, 2017. Computershare issued the shares acquired in the rights offering by book entry in the Company's stock ownership records, which are maintained by Computershare, as transfer agent, on or about April 20, 2017.

On December 5, 2016, the Company entered into Securities Purchase Agreements with certain accredited investors. Pursuant to the Purchase Agreements, the Investors agreed to purchase an aggregate of 1,913,044 shares of the Company’s common stock, par value $1.00 per share, at a price of $11.50 per share, as part of a private placement (the “Private Placement”). The Private Placement closed on December 6, 2016. The gross proceeds to the Company from the Private Placement were approximately $22 million or $20.5 million after stock issuance costs. The proceeds from the Private Placement were used by the Company to pay related transaction fees and expenses and for general corporate purposes. A portion of the proceeds were used for the redemption of the preferred stock issued to the United States Department of Treasury in connection with the Company’s participation in the Small Business Lending Fund.

The Purchase Agreements contain representations and warranties and covenants of the Company and the Investors that are customary in private placement transactions. The provisions of the Purchase Agreements also include an agreement by the Company to indemnify the Investors against certain liabilities.

The Purchase Agreements required the Company to file a registration statement with the SEC to register for resale the 1,913,044 shares of common stock issued to the Investors in the Private Placement. The registration statement was declared effective by the SEC on December 27, 2016.

On June 30, 2014, the Company filed Certificates of Designations for its Convertible Noncumulative Perpetual Preferred Stock, Series B (“Class B Preferred”) and its Convertible Noncumulative Perpetual Preferred Stock, Series C (“Class C Preferred”). The Class B Preferred Certificate designated 400 shares of preferred stock as Class B Preferred shares. The Class B Preferred shares carry an annual dividend rate of 6% and are convertible into shares of Company common stock within thirty days after the first, second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of $16 per share, as adjusted for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class B Preferred Stock regarding the Company's agreement to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion date for the Preferred Stock. The Class B Preferred shares are redeemable by the Company on or after the fifth anniversary of the original issue date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any necessary regulatory approvals. In the event of liquidation of the Company, shares of Class B Preferred stock shall be junior to creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A. Holders of Class B Preferred shares shall have no

29


voting rights, except for authorization of senior shares of stock, amendment to the Class B Preferred shares, share exchanges, reclassifications or changes of control, or as required by law.

The Class C Preferred Certificate designated 383.4 shares of preferred stock as Class C Preferred shares. The Class C Preferred shares carry an annual dividend rate of 6.5% and are convertible into shares of Company common stock within 30 days after the first, second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of $16 per share, as adjusted for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class C Preferred Stock regarding the Company's agreement to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion date for the Preferred Stock. The Class C Preferred shares are redeemable by the Company on or after the fifth anniversary of the original issue date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any necessary regulatory approvals. In the event of liquidation of the Company, shares of Class C Preferred stock shall be junior to creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A, and the Class B Preferred shares. Holders of Class C Preferred shares shall have no voting rights, except for authorization of senior shares of stock, amendment to the Class C Preferred shares, share exchanges, reclassifications, or changes of control, or as required by law. The proceeds of these preferred stock offerings will be used to support continued growth of the Company and its subsidiaries.

On September 8, 2011 MVB received $8.5 million in Small Business Lending Fund (SBLF) capital. MVB issued 8,500 shares of $1,000 per share preferred stock with dividends payable in arrears on January 1, April 1, July 1, and October 1 each year. MVB's loan production qualified for the lowest dividend rate possible of 1%. MVB may continue to utilize the SBLF capital through March 8, 2016 at the 1% dividend rate. After that time, if the SBLF is not retired, the dividend rate increases to 9%. On January 5, 2017, the Company redeemed all of the 8,500 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share (“Series A Preferred Stock”). The aggregate redemption price of the Series A Preferred Stock was $8,508,500, including dividends accrued, but unpaid through, but not including the redemption date. The Series A Preferred Stock was redeemed from the Company’s surplus capital and approved by the Company’s primary federal regulator. The redemption terminates the Company’s participation in the SBLF program. After the redemption, the Company’s capital ratios remained well in excess of those required for well capitalized status.


30


Note 8 – Net Income Per Common Share

The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income less dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted average number of shares outstanding increased by both the number of shares that would be issued assuming the exercise of stock options or restricted stock unit awards under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt if dilutive.
 
 
Three Months Ended March 31,
(Dollars in thousands except shares and per share data)
 
2018
 
2017
Numerator for basic earnings per share:
 
 
 
 
Net income
 
$
2,594

 
$
1,574

Less: Dividends on preferred stock
 
121

 
129

Net income available to common shareholders - basic
 
$
2,473

 
$
1,445

 
 
 
 
 
Numerator for diluted earnings per share:
 
 
 
 
Net income available to common shareholders - basic
 
$
2,473

 
$
1,445

Add: Interest on subordinated debt (tax effected)
 
404

 

Net income available to common shareholders - diluted
 
$
2,877

 
$
1,445

 
 
 
 
 
Denominator:
 
 

 
 

Total average shares outstanding
 
10,474,138

 
9,996,544

Effect of dilutive convertible subordinated debt
 
1,837,500

 

Effect of dilutive stock options and restrictive stock units
 
402,715

 
12,797

Total diluted average shares outstanding
 
12,714,353

 
10,009,341

 
 
 
 
 
Earnings per share - basic
 
$
0.24

 
$
0.14

Earnings per share - diluted
 
$
0.23

 
$
0.14


For the three months ended March 31, 2018 and 2017, approximately 490 thousand and 2.3 million, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the three months ended March 31, 2018, approximately 3 thousand shares of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

Note 9 – Segment Reporting

The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.

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


31


Information about the reportable segments and reconciliation to the consolidated financial statements for the three-month periods ended March 31, 2018 and March 31, 2017 are as follows:
Three Months Ended March 31, 2018
 
Commercial & Retail Banking
 
Mortgage Banking
 
Financial Holding Company
 
Intercompany Eliminations
 
Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
13,838

 
$
1,335

 
$
1

 
$
(120
)
 
$
15,054

Mortgage fee income
 
140

 
6,673

 

 
(250
)
 
6,563

Other income
 
1,780

 
517

 
1,553

 
(1,374
)
 
2,476

     Total operating income
 
15,758

 
8,525

 
1,554

 
(1,744
)
 
24,093

Expenses:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
2,674

 
727

 
558

 
(370
)
 
3,589

Salaries and employee benefits
 
3,569

 
5,416

 
1,488

 

 
10,473

Provision for loan losses
 
417

 
57

 

 

 
474

Other expense
 
4,559

 
2,122

 
959

 
(1,374
)
 
6,266

     Total operating expenses
 
11,219

 
8,322

 
3,005

 
(1,744
)
 
20,802

Income (loss) before income taxes
 
4,539

 
203

 
(1,451
)
 

 
3,291

Income tax expense (benefit)
 
978

 
53

 
(334
)
 

 
697

Net income (loss)
 
$
3,561

 
$
150

 
$
(1,117
)
 
$

 
$
2,594

Preferred stock dividends
 

 

 
121

 

 
121

Net income (loss) available to common shareholders
 
3,561

 
150

 
(1,238
)
 

 
2,473

 
 
 
 
 
 
 
 
 
 
 
Capital Expenditures for the year ended March 31, 2018
 
$
403

 
$
78

 
$
25

 
$

 
$
506

Total Assets as of March 31, 2018
 
1,581,673

 
148,789

 
185,012

 
(333,957
)
 
1,581,518

Total Assets as of December 31, 2017
 
1,533,497

 
149,323

 
184,600

 
(333,117
)
 
1,534,302

Goodwill as of March 31, 2018
 
1,598

 
16,882

 

 

 
18,480

Goodwill as of December 31, 2017
 
1,598

 
16,882

 

 

 
18,480



32


Three Months Ended March 31, 2017
 
Commercial & Retail Banking
 
Mortgage Banking
 
Financial Holding Company
 
Intercompany Eliminations
 
Consolidated
(Dollars in thousands)
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
12,312

 
$
781

 
$
1

 
$
(26
)
 
$
13,068

Mortgage fee income
 
185

 
9,637

 

 
(188
)
 
9,634

Other income
 
1,077

 
(1,831
)
 
1,210

 
(1,266
)
 
(810
)
     Total operating income
 
13,574

 
8,587

 
1,211

 
(1,480
)
 
21,892

Expenses:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
2,119

 
304

 
551

 
(212
)
 
2,762

Salaries and employee benefits
 
2,657

 
5,955

 
1,350

 

 
9,962

Provision for loan losses
 
500

 
18

 

 

 
518

Other expense
 
4,650

 
2,098

 
875

 
(1,268
)
 
6,355

     Total operating expenses
 
9,926

 
8,375

 
2,776

 
(1,480
)
 
19,597

Income (loss) before income taxes
 
3,648

 
212

 
(1,565
)
 

 
2,295

Income tax expense (benefit)
 
1,161

 
96

 
(536
)
 

 
721

Net income (loss)
 
$
2,487

 
$
116

 
$
(1,029
)
 
$

 
$
1,574

Preferred stock dividends
 

 

 
129

 

 
129

Net income (loss) available to common shareholders
 
2,487

 
116

 
(1,158
)
 

 
1,445

 
 
 
 
 
 
 
 
 
 
 
Capital Expenditures for the year ended March 31, 2017
 
$
867

 
$
692

 
$
29

 
$

 
$
1,588

Total Assets as of March 31, 2017
 
1,430,792

 
103,621

 
168,325

 
(268,787
)
 
1,433,951

Total Assets as of December 31, 2016
 
1,415,735

 
122,242

 
180,340

 
(299,513
)
 
1,418,804

Goodwill as of March 31, 2017
 
1,598

 
16,882

 

 

 
18,480

Goodwill as of December 31, 2016
 
1,598

 
16,882

 

 

 
18,480


Commercial & Retail Banking

For the three months ended March 31, 2018, the Commercial & Retail Banking segment earned $3.6 million compared to $2.5 million in 2017. Net interest income increased by $971 thousand, primarily the result of an increase of $949 thousand in interest and fees on loans, an increase of $349 thousand in interest on taxable investment securities, and an increase $217 thousand in tax exempt loans and securities. These increases in interest income were offset by the following: an increase of $392 thousand in interest on deposits and an increase of $160 thousand in interest on FHLB and other borrowings due to an increase in short-term borrowing rates. Noninterest income increased by $658 thousand which was the result of an increase of $413 thousand in commercial swap fee income, an improvement of $183 thousand in the performance of the interest rate cap, and an increase of $203 thousand in gain on sale of portfolio loans. Noninterest expense increased by $821 thousand, primarily the result of the following: an increase of $912 thousand in salaries and employee benefits expense and an increase of $202 thousand in other operating expenses. These increases were partially offset by a decrease of $376 thousand in data processing and communications expense. In addition, provision expense decreased by $83 thousand due to significantly reduced historical loan loss rates, which more than offset the level of provision needed by the increased loan volume in the first quarter of 2018 versus the same quarter in 2017, and a higher level of charge-offs in the first quarter of 2018 versus 2017.

33


Mortgage Banking

For the three months ended March 31, 2018, the Mortgage Banking segment earned $150 thousand compared to $116 thousand in 2017. Net interest income increased $131 thousand, which was the result of an increase of $554 thousand in interest and fees on loans, offset by an increase of $423 thousand in interest on FHLB and other borrowings due to an increase in short-term borrowing rates. Noninterest income decreased by $616 thousand, primarily the result of a decrease of $3.0 million in mortgage fee income, partially offset by an increase of $2.3 million in the gain on derivative. The increase in gain on derivatives was largely the result of a 67.6% increase in the locked mortgage pipeline for the three months ended March 31, 2018 compared to a 12.8% increase in the locked mortgage pipeline for the three months ended March 31, 2017. Noninterest expense decreased by $515 thousand, which was the result of a decrease of $539 thousand in salaries and employee benefits expense. The decrease in salaries and employee benefits expense was primarily the result of lower commissions paid due to a 13.2% decrease in mortgage closed loan volume and a decrease of $125 thousand in the earn out paid to management of the mortgage company related to the 2012 acquisition.

Financial Holding Company

For the three months ended March 31, 2018, the Financial Holding Company segment lost $1.1 million compared to a loss of $1.0 million in 2017. Interest expense increased $7 thousand, noninterest income increased $343 thousand, and noninterest expense increased $222 thousand. In addition, the income tax benefit decreased $202 thousand. The increase in noninterest income was primarily the result of a $186 thousand gain on sale of securities, a $52 thousand holding gain on equity securities, and a $105 thousand increase in intercompany services income related to Regulation W. The increase in noninterest expense was primarily the result of a $138 thousand increase in salaries and employee benefits expense and an increase of $131 thousand in travel, entertainment, dues, and subscriptions.

Note 10 – Pension and Supplemental Executive Retirement Plans

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 employee's compensation. Accruals under the Plan were frozen as of May 31, 2014. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on May 31, 2014 of 4.46%.

Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of March 31, 2018 and 2017 is as follows:
(Dollars in thousands)
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Service cost
 
$

 
$

Interest cost
 
88

 
90

Expected Return on Plan Assets
 
(93
)
 
(86
)
Amortization of Net Actuarial Loss
 
77

 
60

Amortization of Prior Service Cost
 

 

     Net Periodic Benefit Cost
 
$
72

 
$
64

Contributions Paid
 
$
79

 
$
58


On June 19, 2017, the Company and MVB Mortgage approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief Executive Officer of MVB Mortgage is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017. If executive completes three years of continuous employment with MVB Mortgage prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal consecutive installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The liability accrued for this obligation was $95 thousand and $1 thousand as of March 31, 2018 and December 31, 2017, respectively. Service cost was $94 thousand for the three months ended March 31, 2018.


34


Note 11 – Comprehensive Income

The following tables present the components of accumulated other comprehensive income (“AOCI”) three months ended March 31, 2018 and 2017:
(Dollars in thousands)
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
 
Details about AOCI Components
 
Amount Reclassified from AOCI
 
Amount Reclassified from AOCI
 
Affected line item in the Statement where Net Income is presented
Available-for-sale securities
 
 

 
 

 
 
     Unrealized holding gains
 
$
326

 
$
183

 
Gain on sale of securities
 
 
326

 
183

 
Total before tax
 
 
(88
)
 
(73
)
 
Income tax expense
 
 
238

 
110

 
Net of tax
Defined benefit pension plan items
 
 

 
 

 
 
     Amortization of net actuarial loss
 
(77
)
 
(60
)
 
Salaries and benefits
 
 
(77
)
 
(60
)
 
Total before tax
 
 
31

 
24

 
Income tax expense
 
 
(46
)
 
(36
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications
 
$
192

 
$
74

 
 
(Dollars in thousands)
 
Unrealized gains (losses) on available for-sale securities
 
Defined benefit pension plan items
 
Total
Balance at December 31, 2017
 
$
(5
)
 
$
(2,983
)
 
$
(2,988
)
     Other comprehensive loss before reclassification
 
(3,247
)
 
(46
)
 
(3,293
)
     Amounts reclassified from AOCI
 
(238
)
 
46

 
(192
)
Net current period OCI
 
(3,485
)
 

 
(3,485
)
Stranded AOCI
 

 
(646
)
 
(646
)
Mark to Market on equity positions held at December 31, 2017
 
(98
)
 

 
(98
)
Balance at March 31, 2018
 
$
(3,588
)
 
$
(3,629
)
 
$
(7,217
)
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
(1,598
)
 
$
(2,679
)
 
$
(4,277
)
     Other comprehensive loss before reclassification
 
269

 
62

 
331

     Amounts reclassified from AOCI
 
(110
)
 
36

 
(74
)
Net current period OCI
 
159

 
98

 
257

Balance at March 31, 2017
 
$
(1,439
)
 
$
(2,581
)
 
$
(4,020
)

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of our consolidated financial condition at March 31, 2018 and December 31, 2017 and the results of our operations for the three months ended March 31, 2018 and 2017. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2017.

Forward-looking Statements:

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


35


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

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

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

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

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

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

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

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

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

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

changes in fiscal, monetary, regulatory, trade and tax policies and laws, including the recently enacted Tax Reform Act, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the (Federal Reserve, and the FDIC);

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

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

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

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

changes in consumer spending and savings habits;

36



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

inflation and deflation;

technological changes and the implementation of new technologies by the Company and its subsidiaries;

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

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

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

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

other risks and uncertainties detailed in Part I, Item 1A, Risk Factors in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2017

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



37


Summary of Results of Operations

As of March 31, 2018 and 2017 and for the three months ended March 31, 2018 and 2017:

 
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
 
2018
 
2017
 
 
 
 
 
Earnings and Per Share Data:
 
 
 
 
     Net income
 
$
2,594

 
$
1,574

     Net income available to common shareholders
 
$
2,473

 
$
1,445

     Earnings per share - basic
 
$
0.24

 
$
0.14

     Earnings per share - diluted
 
$
0.23

 
$
0.14

     Cash dividends paid per common share
 
$
0.025

 
$
0.025

     Book value per common share
 
$
13.53

 
$
13.09

     Weighted average shares outstanding - basic
 
10,474,138

 
9,996,544

     Weighted average shares outstanding - diluted
 
12,714,353

 
10,009,341

 
 
 
 
 
Performance Ratios:
 
 
 
 
     Return on average assets 1
 
0.68
%
 
0.45
%
     Return on average equity 1
 
6.94
%
 
4.56
%
     Net interest margin 2
 
3.29
%
 
3.19
%
     Efficiency ratio 3
 
81.64
%
 
85.30
%
     Overhead ratio 1 4
 
4.40
%
 
4.65
%
 
 
 
 
 
Asset Quality Data and Ratios:
 
 
 
 
     Charge-offs
 
$
356

 
$
290

     Recoveries
 
$
71

 
$
43

     Net loan charge-offs to total loans 1 5
 
0.10
%
 
0.09
%
     Allowance for loan losses
 
$
10,067

 
$
9,372

     Allowance for loan losses to total loans 6
 
0.87
%
 
0.87
%
     Nonperforming loans
 
$
9,102

 
$
6,575

     Nonperforming loans to total loans
 
0.79
%
 
0.61
%
 
 
 
 
 
Capital Ratios:
 
 
 
 
     Equity to assets
 
9.51
%
 
9.67
%
     Leverage ratio
 
9.50
%
 
9.24
%
     Common equity Tier 1 capital ratio
 
10.60
%
 
10.15
%
     Tier 1 risk-based capital ratio
 
11.57
%
 
11.19
%
     Total risk-based capital ratio
 
14.80
%
 
14.63
%
1 annualized for the quarterly periods presented
2 net interest income as a percentage of average interest earning assets
3 noninterest expense as a percentage of net interest income and noninterest income
4 noninterest expense as a percentage of average assets
5 charge-offs less recoveries
6 excludes loans held for sale


38



Introduction

Corporate Overview

MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).

MVB Bank was chartered in 1997 and commenced operations in 1999.

In 2012, MVB Bank acquired Potomac Mortgage Group, Inc. (“PMG” which began doing business under the registered trade name “MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services company, Lender Service Provider, LLC (“LSP”). In 2013, this fifty percent interest (50%) in LSP was reduced to a twenty-five percent (25%) interest. In 2017, a forfeiture of a partial interest occurred, which increased the interest owned to thirty-three percent (33%). At this time, LSP began doing business as Lenderworks.

MVB Community Development Corporation was formed in 2017 to house significant CRA investments that the Bank participates in to better the communities it serves.

Business Overview

The Company’s primary business activities, through its subsidiaries, are primarily community banking and mortgage banking. The Bank offers its customers a full range of products and services including:

Various demand deposit accounts, savings accounts, money market accounts, and certificates of deposit;
Commercial, consumer, and real estate mortgage loans and lines of credit;
Debit cards;
Cashier's checks;
Safe deposit rental facilities; and
Non-deposit investment services.

The Bank’s financial products and services are offered through its financial service locations and automated teller machines (“ATMs”) in West Virginia and Virginia, as well as telephone and internet-based banking through both personal computers and mobile devices. Non-deposit investment services are offered through an association with a broker-dealer.

Since its opening in 1999, the Bank has experienced significant growth in assets, loans, and deposits due to strong community and customer support in Marion and Harrison counties in West Virginia, expansion into Jefferson, Berkeley, Monongalia, and Kanawha counties in West Virginia and, most recently, into Fairfax and Loudoun counties in Virginia. Since the acquisition of PMG, mortgage banking is now a much more significant focus, which has opened increased market opportunities in the Washington, DC metropolitan region and added enough volume to further diversify the Company’s revenue stream.

This discussion and analysis should be read in conjunction with the prior year-end audited consolidated financial statements and footnotes thereto included in the Company’s 2017 filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.

At March 31, 2018, the Company had 393 full-time equivalent employees.

The Company’s principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800. The Company’s Internet web site is www.mvbbanking.com.

Application of Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with U. S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements; accordingly, as this information changes, the consolidated 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

39


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 consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.

The most significant accounting policies followed by the Company are presented in Note 1, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company's 2017 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in management’s discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the consolidated 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 management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of losses inherent in classifications of homogeneous loans based on the Bank’s historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Non-homogeneous loans are specifically evaluated due to the increased risks inherent in those loans. The loan portfolio also represents the largest asset type in the consolidated balance sheet. Note 1, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company's 2017 Annual Report on Form 10-K, 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 Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

Results of Operations

Overview of the Statements of Income

For the three months ended March 31, 2018, the Company earned $2.6 million compared to $1.6 million in the first quarter of 2017. Net interest income increased by $1.2 million, noninterest income increased by $215 thousand, and noninterest expenses increased by $422 thousand. The increase in net interest income was driven by an increase of $2.0 million in interest income. The increase in interest income was partially offset by an increase of $827 thousand in interest expense. The increase in interest income was due to average loan growth of $35.3 million, with the yield on loans and loans held for sale increasing by 36 basis points, primarily due to an increase in commercial loan yield of 36 basis points and a 33 basis point increase in yield on investment securities. The $90.7 million increase in average interest-bearing liabilities generated the increase in interest expense of $827 thousand; $426 thousand of the increase was related to an increase in interest rates on FHLB and other borrowings, which increased the cost of funds on FHLB and other borrowings by 69 basis points.

The provision for loan losses, which is a product of management's formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provisions of $474 thousand and $518 thousand were made for the quarters ended March 31, 2018 and 2017, respectively. The slight decrease in loan loss provision is most attributable to significantly reduced historical loan loss rates, which more than offset the level of provision needed by the increased loan volume in the first quarter 2018 versus the same quarter in 2017, and a higher level of charge-offs in the first quarter of 2018 versus 2017. The reduction in historical loss rates is the result of the rolling quarter loss rate calculation, which no longer includes certain quarters of 2015 which reported some of the Bank's most significant commercial loan losses. The historical loan loss rates have also decreased in the first quarter of 2018 as a result of the inclusion of the Bank’s actual loss rates for its Northern Virginia commercial loan portfolio, rather than using only peer loss rates in the historical loan loss rate calculations. Peer loss rates have been used exclusively until such time as the Northern Virginia commercial loan portfolio had accumulated at least twelve quarters of loss history. Meanwhile, the total loan portfolio increased by $51.2 million in the first quarter of 2018, while increasing by $23.9 million for the same time period in 2017. The Company charged off $356 thousand in loans during the first quarter of 2018 versus $290 thousand for the same time period in 2017.


40


Interest Income and Expense

Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest-bearing liabilities. Interest-earning assets include loans, investment securities, and certificates of deposits in other banks. Interest-bearing liabilities include interest-bearing deposits and repurchase agreements, subordinated debt, and Federal Home Loan Bank ("FHLB") and other borrowings. Net interest income is a primary source of revenue for the bank. Changes in market interest rates, as well as changes in the mix and volume of interest-earning assets and interest-bearing liabilities impact net interest income.

Net interest margin is calculated by dividing net interest income by average interest-earning assets. This ratio serves as a performance measurement of the net interest revenue stream generated by the Company’s balance sheet. The net interest margin continues to face considerable pressure due to rising interest rates and competitive pricing of loans and deposits in the Bank’s markets. In March 2018, the Federal Reserve raised its key interest rate from a range of 1.25% to 1.50% to a range of 1.50% to 1.75%.

For the three months ended March 31, 2018 versus 2017, the Company was able to grow average investment securities by $64.8 million to $230.0 million and average loans and loans held for sale balances by $35.3 million to $1.2 billion. In addition, the average balance on interest-bearing deposits in banks increased by $1.1 million to $3.9 million. Average interest-bearing liabilities increased by $90.7 million, primarily the result of a $56.2 million increase in average FHLB and other borrowing balances. An increase in the Company’s average non-interest-bearing balances of $16.4 million helped to sustain a 15 basis point favorable spread on net interest margin.

The net interest margin for the three months ended March 31, 2018 and 2017 was 3.29% and 3.19% respectively. The 10 basis point increase in the net interest margin for the quarter ended March 31, 2018 was the result of a 28 basis point increase in yield on average earning assets, primarily the result of a 36 basis point increase in yield on loans and loans held for sale. More specifically, the increase was due to an increase of 36 basis points in commercial loan yield and a 33 basis point increase in yield on investment securities. Cost of interest-bearing liabilities for the three months ended March 31, 2018 versus 2017 increased by 20 basis points. The cost of interest-bearing liabilities increase was mainly the result of a 69-basis point increase in FHLB and other borrowings and a 13 basis point increase in interest-bearing deposits. More specifically, the increase in interest-bearing deposits was as follows: a 21 basis point increase in certificates of deposit, a 21 basis point increase in IRAs, an 19 basis point increase in NOW and offset by a 4 basis point decrease in money market checking.

Company and Bank management continuously monitor the effects of net interest margin on the performance of the Bank and, thus, the Company. Growth and mix of the balance sheet will continue to impact net interest margin in future periods.


41


MVB Financial Corp. and Subsidiaries
Average Balances and Interest Rates
(Unaudited) (Dollars in thousands)
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(Dollars in thousands)
 
Average Balance
 
Interest Income/Expense
 
Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Yield/Cost
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in banks
 
$
3,883

 
$
18

 
1.83
%
 
$
2,734

 
$
10

 
1.48
%
CDs with other banks
 
14,778

 
72

 
1.97

 
14,527

 
69

 
1.93

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
     Taxable
 
154,430

 
895

 
2.35

 
108,862

 
546

 
2.03

     Tax-exempt
 
75,556

 
655

 
3.51

 
56,280

 
430

 
3.10

Loans and loans held for sale: 1
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial
 
775,764

 
8,943

 
4.68

 
746,364

 
7,943

 
4.32

     Tax exempt
 
14,464

 
123

 
3.46

 
15,329

 
131

 
3.47

     Real estate
 
360,744

 
4,190

 
4.71

 
352,144

 
3,764

 
4.33

     Consumer
 
12,517

 
158

 
5.11

 
14,370

 
175

 
4.94

Total loans
 
1,163,489

 
13,414

 
4.68

 
1,128,207

 
12,013

 
4.32

Total earning assets
 
1,412,136

 
15,054

 
4.32

 
1,310,610

 
13,068

 
4.04

Less: Allowance for loan losses
 
(9,987
)
 
 
 
 
 
(9,427
)
 
 
 
 
Cash and due from banks
 
15,966

 
 
 
 
 
15,246

 
 
 
 
Other assets
 
102,645

 
 
 
 
 
86,215

 
 
 
 
     Total assets
 
$
1,520,760

 
 
 
 
 
$
1,402,644

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
     NOW
 
$
443,784

 
$
762

 
0.70

 
$
415,627

 
$
525

 
0.51

     Money market checking
 
241,472

 
443

 
0.74

 
236,845

 
458

 
0.78

     Savings
 
46,544

 
20

 
0.17

 
48,092

 
19

 
0.16

     IRAs
 
17,691

 
62

 
1.43

 
16,573

 
50

 
1.22

     CDs
 
269,286

 
1,011

 
1.52

 
264,626

 
854

 
1.31

Repurchase agreements and federal funds sold
 
20,605

 
19

 
0.37

 
23,113

 
17

 
0.30

FHLB and other borrowings
 
160,205

 
714

 
1.81

 
103,990

 
288

 
1.12

Subordinated debt
 
33,524

 
558

 
6.75

 
33,524

 
551

 
6.67

     Total interest-bearing liabilities
 
1,233,111

 
3,589

 
1.18

 
1,142,390

 
2,762

 
0.98

Noninterest bearing demand deposits
 
129,385

 
 
 
 
 
113,021

 
 
 
 
Other liabilities
 
8,673

 
 
 
 
 
9,226

 
 
 
 
     Total liabilities
 
1,371,169

 
 
 
 
 
1,264,637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
7,834

 
 
 
 
 
8,212

 
 
 
 
Common stock
 
10,525

 
 
 
 
 
10,048

 
 
 
 
Paid-in capital
 
99,110

 
 
 
 
 
93,476

 
 
 
 
Treasury stock
 
(1,084
)
 
 
 
 
 
(1,084
)
 
 
 
 
Retained earnings
 
38,004

 
 
 
 
 
31,651

 
 
 
 
Accumulated other comprehensive income
 
(4,798
)
 
 
 
 
 
(4,296
)
 
 
 
 
     Total stockholders’ equity
 
149,591

 
 
 
 
 
138,007

 
 
 
 
     Total liabilities and stockholders’ equity
 
$
1,520,760

 
 
 
 
 
$
1,402,644

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread
 
 
 
 
 
3.14

 
 
 
 
 
3.06

Net interest income-margin
 
 
 
$
11,465

 
3.29
%
 
 

 
$
10,306

 
3.19
%
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.

42


Noninterest Income

Mortgage fee income, gain (loss) on derivatives, interchange income, security sale gains, income on bank owned life insurance and portfolio loan sales generate the core of the Company’s noninterest income. Also, service charges on deposit accounts continue to be part of the core of the Company’s noninterest income and include mainly non-sufficient funds and returned check fees, allowable overdraft fees and service charges on commercial accounts. 

For the three months ended March 31, 2018, noninterest income totaled $9.0 million compared to $8.8 million for the same time period in 2017. The $215 thousand increase in noninterest income was primarily the result of an increase in gain on derivatives of $2.5 million and an increase in commercial swap fee income of $413 thousand, offset by a decrease of $3.1 million in mortgage fee income. The increase in gain on derivatives was largely the result of a 67.6% increase in the locked mortgage pipeline for the three months ended March 31, 2018 compared to a 12.8% increase in the locked mortgage pipeline for the three months ended March 31, 2017. The increase of $413 thousand in commercial swap fee income was the result of an increase in swap volume from $0 for the first quarter of 2017 to $29.0 million in the first quarter of 2018. The loan swaps are agreements where MVB receives a floating, 1-month LIBOR plus spread and pays a fixed rate to a counterparty. This was offset by the decrease in mortgage production volume, which decreased by $44.0 million or 13.2% in the first quarter of 2018 compared to the first quarter of 2017. In addition, loans held for sale decreased from $66.8 million at March 31, 2017 to $51.3 million at March 31, 2018.

Noninterest Expense

The Company had 393 full-time equivalent personnel at March 31, 2018, as noted, compared to 376 full-time equivalent personnel as of March 31, 2017. Company and Bank management will continue to strive to find new ways of increasing efficiencies and leveraging its resources, while effectively optimizing customer service.

Salaries and employee benefits, occupancy and equipment, data processing and communications, mortgage processing and professional fees generate the core of the Company’s noninterest expense. The Company’s efficiency ratio was 81.64% for the first quarter of 2018 compared to 85.30% for the first quarter of 2017. This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus noninterest income. The decreased efficiency ratio is the result of net interest income and noninterest income outpacing the growth in noninterest expense.

For the three months ended March 31, 2018, noninterest expense totaled $16.7 million compared to $16.3 million for the same time period in 2017. The $422 thousand increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased $511 thousand. This increase was largely driven by the addition of lenders, a treasury team, and the opening of two new branches in 2017.

Occupancy and equipment expense increased $150 thousand. This increase was mainly the result of increased utilities, real estate taxes, furniture rental expense, fixtures and equipment expense, and depreciation expense, primarily driven by the branch expansion and additional personnel.

Travel, entertainment, dues, and subscriptions expense increased $147 thousand. This increase was mainly driven by increased meals and entertainment expense, publications and subscriptions expense, and travel expenses.

Data processing and communication expense decreased $378 thousand. This decrease was largely driven by decreased data processing fees in 2018 compared to data processing fees in 2017, which were increased due to the core system conversion that the Bank implemented during 2017 and the exclusion of debit and credit card processing costs for the three month period ended March 31, 2018 . Beginning in 2018 and in connection with the adoption of ASU 2014-09, debit and credit card processing costs are being reported net of the related revenue in noninterest income. See Note 1 "Summary of Significant Policies" of the Notes to the Consolidated Financial Statements for further information. Previously, such debit and credit card processing costs were reported as a component of data processing and communications expense.

Return on Average Assets (Annualized)

The Company’s return on average assets was 0.68% for the first quarter of 2018, compared to 0.45% for the first quarter of 2017. The increased return for the first quarter of 2018 is a direct result of a $1.0 million increase in earnings, while average total assets increased by $118.1 million, primarily the result of a $35.3 million increase in average total loans and loans held for sale and a $64.8 million increase in average investment securities.


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Return on Average Equity (Annualized)

The Company’s return on average stockholders’ equity was 6.94% for the first quarter of 2018, compared to 4.56% for the first quarter of 2017. The increased return for the first quarter of 2018 is a direct result of a $1.0 million increase in earnings, while average stockholders' equity increased by $11.6 million. The increase in average stockholders' equity was primarily due to a $5.6 million increase in paid-in capital and a $6.4 million increase in retained earnings.

Overview of the Statement of Condition

The greatest balance changes since December 31, 2017 were as follows: total assets increased by $47.2 million, to $1.6 billion, loans increased $51.2 million to $1.2 billion investment securities increased $2.0 million to $233.5 million, deposits decreased $5.7 million to $1.2 billion, borrowings increased $55.2 million to $207.4 million, and stockholders' equity increased by $229 thousand, to $150.4 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $23.6 million at March 31, 2018, compared to $20.3 million at December 31, 2017.

Management believes the current balance of cash and cash equivalents adequately serves the Company’s 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 liquidity needs 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 the Company to meet cash obligations as they come due.

Investment Securities

Investment securities totaled $233.5 million at March 31, 2018, compared to $231.5 million at December 31, 2017. As of March 31, 2018, the investment portfolio is comprised of the following mix of securities:

34.3% – Municipal securities
34.6% – U.S. Agency securities
24.1% – U.S. Sponsored Mortgage-backed securities
4.0% – Equity securities
3.0% – Other securities

The Company and Bank management monitor 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 assists in the management of interest rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, sufficient liquidity is maintained to satisfy depositor requirements and the various credit needs of its customers. The Company and Bank management believe the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

Loans

The Company’s loan portfolio totaled $1.2 billion as of March 31, 2018 and $1.1 billion as of December 31, 2017. The Bank’s lending is primarily focused in the Marion, Harrison, Jefferson, Berkeley, Monongalia, and Kanawha counties of West Virginia, and Fairfax and Loudoun counties of Virginia, with a secondary focus on the adjacent counties. Its extended market is in the adjacent counties. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. The growth in loans is primarily attributable to organic growth within the Bank’s primary lending areas and northern Virginia.

Loan Concentration

At March 31, 2018 and December 31, 2017$824.6 million, or 71.3% and $783.9 million, or 70.9%, respectively, of our loan portfolio consisted of commercial loans. A significant portion of the nonresidential real estate loan portfolio is secured by commercial real estate. The majority of nonresidential real estate loans that are not secured by real estate are lines of credit secured by accounts receivable and equipment and obligations of states and political subdivisions. While the loan concentration is in nonresidential real

44


estate loans, the nonresidential real estate portfolio is comprised of loans to many different borrowers, in numerous different industries but primarily located in our market areas.

Allowance for Loan Losses

The allowance for loan losses was $10.1 million or 0.87% of total loans at March 31, 2018 compared to $9.9 million or 0.89% of total loans at December 31, 2017. The nominal decrease in this ratio was the direct result of the net effect of loan loss provision, charge-offs, and recoveries; in conjunction with growth in outstanding loan balances in the commercial loan and residential real estate loan portfolios, since December 31, 2017. The Bank 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, and changes in the local and national economy. When appropriate, Management also considers public knowledge and/or verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.

Capital Resources

The Bank 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, totaling $1.2 billion at March 31, 2018.

Noninterest-bearing deposits remain a core funding source for the Bank and thus, the Company. At March 31, 2018, noninterest-bearing balances totaled $142.8 million compared to $126.0 million at December 31, 2017. The Company and Bank management intend to continue to focus on finding ways to increase the base of non-interest-bearing sources of the Bank and its subsidiaries.

Interest-bearing deposits totaled $1.0 billion at March 31, 2018 compared to $1.0 billion at December 31, 2017.

Average interest-bearing deposits totaled $1.0 billion during the first quarter of 2018 compared to $981.8 million during the first quarter of 2017, an increase of $37.0 million. Average noninterest bearing deposits totaled $129.4 million during the first quarter of 2018 compared to $113.0 million during the first quarter of 2017. Management will continue to emphasize deposit gathering in 2018 by offering outstanding customer service and competitively priced products. The Company and Bank management will also concentrate on balancing deposit growth with adequate net interest margin to meet the Company’s strategic goals.

Along with traditional deposits, the Bank has access to both repurchase agreements, which are corporate deposits secured by pledging securities from the investment portfolio, and FHLB borrowings to fund its operations and investments. At March 31, 2018, repurchase agreements totaled $20.7 million compared to $22.4 million at December 31, 2017. In addition to the aforementioned funds alternatives, the Bank has access to more than $139.7 million through additional advances from the FHLB of Pittsburgh and the ability to readily sell jumbo certificates of deposits to other banks as well as brokered deposit markets.

Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the Asset and Liability Committee (“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 MVB’s 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 the Bank 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 three months ended March 31, 2018, cash provided by financing activities totaled $48.7 million, while outflows from investing activity totaled $60.6 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the 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 the Bank 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.

The Company has an effective shelf registration covering $75 million of debt and equity securities, of which approximately $70 million remains available, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion.

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While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.

Current Economic Conditions

The Company considers its primary market area to be comprised of those counties where it has a physical branch presence and their contiguous counties. This includes Marion, Harrison, Jefferson, Berkeley, Monongalia, and Kanawha counties of West Virginia and Fairfax and Loudoun counties of Virginia. In addition, MVB Mortgage has mortgage-only offices located in Virginia, Washington, DC, North Carolina, and South Carolina. The Bank currently operates a total of fourteen full-service banking branches: twelve in West Virginia and two in Virginia. MVB Mortgage operates ten mortgage-only offices, located in Virginia, within the Washington, DC metropolitan area, North Carolina, and South Carolina. In addition, MVB Mortgage has mortgage loan originators located at select Bank locations throughout West Virginia.

The Company originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, the Company retains most of its originated loans (exclusive of long-term, fixed rate residential mortgages that are sold.) However, loans originated in excess of the Bank’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by the Bank.

The current economic climate in the Company’s primary market areas reflect economic climates that are consistent with the general national climate. Unemployment in the United States was 4.1% and 4.6% in March 2018 and 2017, respectively. The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:
 
 
February 2018
 
February 2017
Berkeley County, WV
 
4.9
%
 
3.9
%
Harrison County, WV
 
5.7
%
 
5.9
%
Jefferson County, WV
 
4.0
%
 
3.4
%
Marion County, WV
 
6.5
%
 
5.8
%
Monongalia County, WV
 
4.5
%
 
4.1
%
Kanawha County, WV
 
6.0
%
 
5.4
%
Fairfax County, VA
 
2.6
%
 
3.1
%
Loudoun County, VA
 
2.6
%
 
3.1
%

Capital/Stockholders' Equity

For the three months ended March 31, 2018, stockholders’ equity increased approximately $229 thousand to $150.4 million. This increase consists of net income for the quarter of $2.6 million and common stock options exercised totaling $1.3 million, offset by a $3.5 million other comprehensive loss and dividends paid totaling $384 thousand. As stockholders’ equity increased, the equity to assets ratio decreased 0.16% to 9.51% due to the increase in total assets during the first quarter of 2018. The Company paid dividends to common shareholders of $263 thousand in the first quarter of 2018 and $250 thousand in the first quarter of 2017 and earned $2.6 million in the first quarter of 2018 versus $1.6 million in the first quarter of 2017, resulting in the dividend payout ratio decreasing from 14.68% in the first quarter of 2017 to 9.70% in the first quarter of 2018.

The Company and the Bank have financed operations and growth over the years through the sale of equity. These equity sales have resulted in an effective source of capital. For more information related to equity sales, see Note 7, "Stock Offerings" of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

At March 31, 2018, accumulated other comprehensive loss totaled $7.2 million, an increase in the loss of $4.2 million from December 31, 2017. Total securities available-for-sale in an unrealized loss position increased by $3.6 million to $6.1 million at March 31, 2018. 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 fair value.

Treasury stock totaled 51,077 shares.

The primary source of funds for dividends to be paid by the Company are dividends received by the Company from the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires regulatory

46


approval if dividends declared in any year exceed that year's retained net profits, as defined, plus the retained net profits, as defined, of the two preceding years.

Capital Requirements

The Company’s total risk-based capital ratio decreased from 14.87% at December 31, 2017 to 14.80% at March 31, 2018. The decrease in this ratio was largely due to a   decrease in total risk-based capital, primarily the result of the redemption of the preferred stock issued to the United States Department of Treasury in connection with the Company's participation in the SBLF, as discussed in Note 7, "Stock Offerings" of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of the Quarterly Report on Form 10-Q.

The Company and the Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and the FDIC, respectively (“Capital Rules”). State chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.

The Capital Rules, among other things, (i) include a “Common Equity Tier 1” (“CET1”) measure, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.

Under the Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:

4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio”).

The Capital Rules also include a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The Capital Rules also provide for a “countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

When fully phased in on January 1, 2019, the Capital Rules will require the Company and the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.

The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

With respect to the Bank, the Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”


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Prompt Corrective Action

The FDIA requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio, and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

For further information regarding the capital ratios and leverage ratio of the Company and the Bank see the discussion under the section captioned “Capital/Stockholders’ Equity” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14, “Regulatory Capital Requirements” of the Notes to the Consolidated Financial Statements

48


included in Item 8, Financial Statements and Supplementary Data, of the Company's December 31, 2017 Annual Report on Form 10-K.

Commitments and Contingent Liabilities

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 Company’s 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 customer’s 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 management’s 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 Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

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, Monongalia, Kanawha, Jefferson, and Berkeley County areas of West Virginia as well as the Northern Virginia area 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 management’s credit evaluation.

Regulatory

The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average balance maintained in accordance with such requirements was $0 on March 31, 2018 and December 31, 2017, respectively. During 2016, a deposit reclassification program was implemented and allowed the Company to reduce its requirement of reserve balances on hand in accordance with the Federal Reserve Board the daily Federal Reserve Requirement.

Contingent Liability

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.

Off-Balance Sheet Commitments

The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.

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.


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Market Risk

There have been no material changes in market risks faced by the Company since December 31, 2017. For information regarding the Company’s market risk, refer to the company’s December 31, 2017, Form 10-K filed with the SEC.


Effects of Inflation and Changing Prices

Substantially all of the Company’s assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the banking industry, typically monetary assets exceed monetary liabilities. Therefore, as prices increase, financial institutions experience a decline in the purchasing power of their net assets.

Future Outlook

The Company’s net income increased in the first quarter of 2018 compared to the first quarter of 2017 mainly due to an increase in interest income due to a $51.2 million increase in loans, an increase in gain on derivatives due to a 67.6% increase in the locked mortgage pipeline for the three months ended March 31, 2018 compared to a 12.8% increase in the locked mortgage pipeline for the three months ended March 31, 2017, an increase in commercial swap fee income, and decreased income taxes as a result of the Tax Reform Act that was signed into law in late 2017. The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel, technology, and processes to meet the growing compliance requirements in the industry. The Company believes it is well positioned in some of the finest markets in the State of West Virginia and the Commonwealth of Virginia and will continue to focus on the following: margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to attract core deposits to fund growth in the new markets through continued delivery of outstanding customer service coupled with the highest quality products and technology.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk is composed primarily of interest rate risk. The Asset and Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Company’s sources, uses, and pricing of funds.

Interest Rate Sensitivity Management

The Company uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twenty-four-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities as of December 31, 2017. The model assumes changes in interest rates without any management intervention to change the composition of the balance sheet. According to the model run for the period ended December 31, 2017, over a twelve-month period, an immediate 100-basis point increase in interest rates would result in a decrease in net interest income by 1.6%. An immediate 200-basis point increase in interest rates would result in a decrease in net interest income by 3.2%. A 100-basis point decrease in interest rates would result in a decrease in net interest income of 0.3%. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its ALCO. The ALCO meets quarterly and has responsibility for formulating and implementing strategies to improve balance sheet positioning and reviewing interest rate sensitivity.

The Company has counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. The Company works with third-party investors that are generally well-capitalized, are investment grade, and exhibit strong financial performance to mitigate this risk. The Company does not expect any third-party investor to fail to meet its obligation. The Company monitors the financial condition of these third parties on an annual basis and the Company does not expect these third parties to fail to meet their obligations.


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Item 4 – Controls and Procedures

The Company, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of March 31, 2018, of the design and operation of the Company’s 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 Company’s President and Chief Executive Officer, along with the Company’s Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.

There have been no material changes in the Company’s internal control over financial reporting during the first quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities, including the risk factors that are described in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2017. There have been no material changes in our risk factors from those disclosed.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

On March 13, 2017, the Company filed with the SEC a prospectus supplement and accompanying base prospectus (collectively, the “Prospectus”) relating to the commencement of the Company’s rights offering (the “Rights Offering”), pursuant to which the Company distributed, at no charge, non-transferable subscription rights to the holders of its common stock as of 5:00 p.m., Eastern time, on March 10, 2017. The subscription rights were exercisable for up to a total of 434,783 shares of the Company’s common stock, subject to such terms and conditions as further described in the Prospectus.

On March 13, 2017, the Company also entered into an Investment Agreement (the “Investment Agreement”) with its Chief Executive Officer, Larry F. Mazza (“Mazza”). Pursuant to the Investment Agreement, Mazza committed to subscribe for and purchase, at a price of $11.50 per common share, upon expiration of the Rights Offering, the number of shares of the Company’s common stock, if any, equal to the amount by which 100,000 exceeds the number of shares purchased by Mazza in the Rights Offering. Pursuant to the Investment Agreement, Mazza agreed not to sell or otherwise transfer any shares acquired in connection with the Investment Agreement for a period of six months following the closing of the Rights Offering. Upon completion of the Rights Offering, on April 14, 2017, Mazza purchased an additional 9,001 shares of common stock under the Investment Agreement, which purchase was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.


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Item 6 – Exhibits
The following exhibits are filed herewith:

Certificate of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
XBRL Instance Document
Exhibit 101.SCH
XBRL Taxonomy Extension Schema
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
MVB Financial Corp.
 
 
 
Date:
May 7, 2018
By:
/s/ Larry F. Mazza
 
 
Larry F. Mazza
 
 
President, CEO and Director
 
 
(Principal Executive Officer)
 
 
 
 
Date:
May 7, 2018
By:
/s/ Donald T. Robinson
 
 
 
Donald T. Robinson
 
 
 
Executive Vice President and CFO
 
 
 
(Principal Financial and Accounting Officer)



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