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Table of Contents
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 September 30, 2019
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
mvbf-20190930_g1.jpg
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
West Virginia20-0034461
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.00 par valueMVBFThe Nasdaq Stock Market LLC
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.
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 October 27, 2019, the Registrant had 11,824,449 shares of common stock outstanding with a par value of $1.00 per share.

Table of Contents
TABLE OF CONTENTS

Page

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Table of Contents
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
September 30, 2019December 31, 2018
(Unaudited)(Note 1)
ASSETS
Cash and cash equivalents:
     Cash and due from banks$22,853  $14,747  
     Interest bearing balances with banks13,715  7,474  
     Total cash and cash equivalents36,568  22,221  
Certificates of deposit with other banks13,541  14,778  
Investment securities available-for-sale, at fair value226,064  221,614  
Equity securities18,414  9,599  
Loans held for sale159,961  75,807  
Loans:1,382,375  1,304,366  
     Less: Allowance for loan losses(11,874) (10,939) 
     Net Loans1,370,501  1,293,427  
Premises and equipment, net25,446  26,545  
Bank owned life insurance34,576  34,291  
Accrued interest receivable and other assets57,251  34,207  
Goodwill19,630  18,480  
TOTAL ASSETS$1,961,952  $1,750,969  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Deposits: 
     Noninterest bearing$274,970  $213,597  
     Interest bearing1,181,434  1,095,557  
     Total deposits1,456,404  1,309,154  
Accrued interest payable and other liabilities44,083  17,706  
Repurchase agreements9,460  14,925  
FHLB and other borrowings241,641  214,887  
Subordinated debt4,124  17,524  
     Total liabilities1,755,712  1,574,196  
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1,000; 20,000 authorized; 733 issued in 2019 and 783 issued in 2018, respectively (See Footnote 7)7,334  7,834  
Common stock, par value $1; 20,000,000 shares authorized; 11,865,426 shares issued and 11,814,349 shares outstanding in 2019 and 11,658,370 shares issued and 11,607,293 shares outstanding in 201811,865  11,658  
Additional paid-in capital120,918  116,897  
Retained earnings69,349  48,274  
Accumulated other comprehensive loss(2,142) (6,806) 
Treasury stock, 51,077 shares, at cost(1,084) (1,084) 
     Total stockholders’ equity206,240  176,773  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$1,961,952  $1,750,969  

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)
Nine Months Ended September 30Three Months Ended September 30
2019201820192018
INTEREST INCOME
     Interest and fees on loans$55,469  $44,777  $19,238  $16,364  
     Interest on deposits with other banks379  284  132  103  
     Interest on investment securities - taxable2,336  2,655  689  869  
     Interest on tax exempt loans and securities2,947  2,458  979  840  
     Total interest income61,131  50,174  21,038  18,176  
INTEREST EXPENSE
     Interest on deposits13,124  7,938  4,453  3,110  
     Interest on repurchase agreements37  49  12  10  
     Interest on FHLB and other borrowings3,707  3,110  1,383  1,199  
     Interest on subordinated debt728  1,433  156  333  
     Total interest expense17,596  12,530  6,004  4,652  
NET INTEREST INCOME43,535  37,644  15,034  13,524  
     Provision for loan losses1,557  2,148  657  1,069  
     Net interest income after provision for loan losses41,978  35,496  14,377  12,455  
NONINTEREST INCOME
     Service charges on deposit accounts985  741  337  275  
     Income on bank owned life insurance973  958  224  520  
     Interchange and debit card transaction fees472  459  150  167  
     Mortgage fee income28,030  24,634  11,496  9,008  
     Gain on sale of portfolio loans228  217  50  5  
     Insurance and investment services income502  540  179  199  
     (Loss) gain on sale of available-for-sale securities, net(179) 327  (11) 1  
     (Loss) on sale of equity securities, net(7) —  —  —  
     Gain (loss) on derivatives, net2,689  509  1,108  (728) 
     Commercial swap fee income1,146  419  628  6  
     Holding gain on equity securities13,767  583  —  623  
     Other operating income1,242  958  535  435  
     Total noninterest income49,848  30,345  14,696  10,511  
NONINTEREST EXPENSES
     Salary and employee benefits40,452  34,487  15,438  11,520  
     Occupancy expense3,454  3,178  1,103  1,049  
     Equipment depreciation and maintenance2,689  2,439  931  834  
     Data processing and communications3,025  2,735  1,068  938  
     Mortgage processing2,253  2,751  728  867  
     Marketing, contributions, and sponsorships945  966  437  271  
     Professional fees3,025  2,548  1,316  1,015  
     Printing, postage, and supplies481  597  174  198  
     Insurance, tax, and assessment expense1,410  1,333  418  487  
     Travel, entertainment, dues, and subscriptions2,719  1,991  1,125  712  
     Other operating expenses1,765  1,380  642  526  
     Total noninterest expense62,218  54,405  23,380  18,417  
Income from continuing operations, before income taxes29,608  11,436  5,693  4,549  
Income tax expense - continuing operations7,139  2,432  1,347  970  
Net income from continuing operations$22,469  $9,004  $4,346  $3,579  
Income (loss) from discontinued operations, before income taxes575  —  (25) —  
Income tax expense (benefit) - discontinued operations148  —  (6) —  
Net income (loss) from discontinued operations$427  $—  $(19) $—  
Net income$22,896  $9,004  $4,327  $3,579  
Preferred dividends364  366  121  123  
Net income available to common shareholders22,532  8,638  4,206  3,456  

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Earnings per share from continuing operations - basic$1.89  $0.80  $0.36  $0.30  
Earnings per share from discontinued operations - basic$0.04  $—  $—  $—  
Earnings per share - basic$1.93  $0.80  $0.36  $0.30  
Earnings per share from continuing operations - diluted$1.84  $0.77  $0.35  $0.29  
Earnings per share from discontinued operations - diluted$0.04  $—  $—  $—  
Earnings per share - diluted$1.88  $0.77  $0.35  $0.29  
Cash dividends declared - common shares$0.125  $0.080  $0.050  $0.030  
Weighted average shares outstanding - basic11,661,581  10,845,166  11,731,774  11,416,202  
Weighted average shares outstanding - diluted11,957,385  11,690,314  12,098,335  13,113,259  

See accompanying notes to unaudited consolidated financial statements.
5

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Nine Months Ended September 30Three Months Ended September 30
2019201820192018
Net Income  $22,896  $9,004  $4,327  $3,579  
     Other comprehensive income (loss): 
     Unrealized holding gains (losses) on securities available-for-sale 7,913  (7,455) 1,362  (2,119) 
     Income tax effect  (2,137) 2,012  (368) 571  
     Reclassification adjustment for loss (gain) recognized in income 179  (327) 11  (1) 
     Income tax effect  (48) 88  (2) —  
     Change in defined benefit pension plan  (1,541) 972  (829) 200  
     Income tax effect  416  (262) 224  (54) 
     Carrying value adjustment - investment hedge(162) —  (36) —  
     Income tax effect  44  —  10  —  
Total other comprehensive income (loss) 4,664  (4,972) 372  (1,403) 
Comprehensive income  $27,560  $4,032  $4,699  $2,176  

See accompanying notes to unaudited consolidated financial statements.

6

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) (Dollars in thousands except per share data)
 Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive (Loss)Treasury StockTotal Stockholders' Equity
Balance at January 1, 20197,834  11,658  116,897  48,274  (6,806) (1,084) 176,773  
Net Income—  —  —  22,896  —  —  22,896  
Other comprehensive income—  —  —  —  4,664  —  4,664  
Cash dividends paid ($0.125 per common share)—  —  —  (1,457) —  —  (1,457) 
Dividends on preferred stock—  —  —  (364) —  —  (364) 
Stock based compensation—  —  1,319  —  —  —  1,319  
Common stock options exercised—  80  796  —  —  —  876  
Restricted stock units vested—  10  (10) —  —  —  —  
Common stock issued from subordinated debt conversion, net of costs—  62  938  —  —  —  1,000  
Common stock issued related to Chartwell acquisition (See Note 16)—  55  978  —  —  —  1,033  
Preferred stock redemption(500) —  —  —  —  —  (500) 
Balance at September 30, 2019$7,334  $11,865  $120,918  $69,349  $(2,142) $(1,084) $206,240  
Balance at June 30, 2019$7,834  $11,764  $118,948  $65,728  $(2,514) $(1,084) $200,676  
Net Income—  —  —  4,327  —  —  4,327  
Other comprehensive income—  —  —  372  —  372  
Cash dividends paid ($0.05 per common share)—  —  —  (585) —  —  (585) 
Dividends on preferred stock—  —  —  (121) —  —  (121) 
Stock based compensation—  —  493  —  —  —  493  
Common stock options exercised—  46  499  —  —  —  545  
Restricted stock units vested—  —  —  —  —  —  —  
Common stock issued from subordinated debt conversion, net of costs—  —  —  —  —  —  —  
Common stock issued related to Chartwell acquisition (See Note 16)—  55  978  —  —  —  1,033  
Preferred stock redemption(500) —  —  —  —  —  (500) 
Balance at September 30, 2019$7,334  $11,865  $120,918  $69,349  $(2,142) $(1,084) $206,240  
Balance at January 1, 2018$7,834  $10,496  $98,698  $37,236  $(2,988) $(1,084) $150,192  
Net Income—  —  —  9,004  —  —  9,004  
Other comprehensive loss—  —  —  —  (4,972) —  (4,972) 
Cash dividends paid ($0.08 per common share)—  —  —  (873) —  —  (873) 
Dividends on preferred stock—  —  —  (366) —  —  (366) 
Stock based compensation—  —  920  —  —  —  920  
Common stock options exercised—  153  1,853  —  —  —  2,006  
Stranded AOCI (See Note 2)—  —  —  646  (646) —  —  
Mark to Market on equity positions held at December 31, 2017 (See Note 2)—  —  —  98  (98) —  —  
Restricted stock units vested—  1  (1) —  —  —  0
Common stock issued from subordinated debt conversion, net of costs—  938  14,027  —  —  —  14,965  
Balance at September 30, 2018$7,834  $11,588  $115,497  $45,745  $(8,704) $(1,084) $170,876  
Balance at June 30, 2018$7,834  $11,389  $112,321  $42,636  $(7,301) $(1,084) $165,795  
Net Income—  —  —  3,579  —  —  3,579  
Other comprehensive loss—  —  —  —  (1,403) —  (1,403) 
Cash dividends paid ($0.03 per common share)—  —  —  (347) —  —  (347) 
Dividends on preferred stock—  —  —  (123) —  —  (123) 
Stock based compensation—  —  394  —  —  —  394  
Common stock options exercised—  56  653  —  —  —  709  
Restricted stock units vested1  (1) —  —  
Common stock issued from subordinated debt conversion, net of costs—  142  2,130  —  —  —  2,272  
Balance at September 30, 2018$7,834  $11,588  $115,497  $45,745  $(8,704) $(1,084) $170,876  
See accompanying notes to unaudited consolidated financial statements.
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MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Nine Months Ended September 30,
20192018
OPERATING ACTIVITIES  
Net Income  $22,896  $9,004  
Adjustments to reconcile net income to net cash (used in) provided by operating activities: 
     Net amortization and accretion of investments  917  994  
     Net amortization of deferred loan costs  190  105  
     Provision for loan losses  1,557  2,148  
     Depreciation and amortization  2,346  2,210  
     Stock based compensation  1,319  920  
     Loans originated for sale  (1,151,918) (933,134) 
     Proceeds of loans sold  1,095,794  960,856  
     Mortgage fee income  (28,030) (24,634) 
     Gain on sale of available-for-sale securities  (80) (352) 
     Loss on sale of available-for-sale securities  259  25  
     Loss on sale of equity securities  7  —  
     Gain on sale of portfolio loans  (228) (217) 
     Income on bank owned life insurance  (973) (958) 
     Deferred taxes  (4,214) 263  
     Amortization of operating lease right-of-use asset  56  —  
     Holding (gain) on equity securities (13,767) (583) 
     Other, net  8,088  (3,473) 
     Net cash (used in) provided by operating activities (65,781) 13,174  
INVESTING ACTIVITIES  
     Purchases of investment securities available-for-sale  (52,892) (19,742) 
     Maturities/paydowns of investment securities available-for-sale  29,287  16,283  
     Sales of investment securities available-for-sale  26,996  2,794  
     Purchases of premises and equipment  (1,134) (2,164) 
     Net increase in loans  (78,593) (190,994) 
     Purchases of restricted bank stock  (34,507) (17,750) 
     Redemptions of restricted bank stock  31,604  17,550  
     Proceeds from sale of certificates of deposit with banks  1,237  —  
     Proceeds from sale of other real estate owned  731  362  
     Proceeds from death benefit of bank owned life insurance policies  688  706  
     Purchase of equity securities  (1,300) (2,000) 
     Sales of equity securities  5,968  —  
     Net cash used in business combination  (2,651) —  
     Net cash used in investing activities  (74,566) (194,955) 
FINANCING ACTIVITIES  
     Net increase in deposits  147,250  219,606  
     Net decrease in repurchase agreements  (5,465) (6,648) 
     Net change in short-term FHLB & other borrowings  28,416  (67,909) 
     Principal payments on FHLB & other borrowings  (1,662) (12,260) 
     Proceeds from new FHLB & other borrowings  —  50,000  
     Subordinated debt redemption  (12,400) —  
     Subordinated debt conversion  —  (35) 
     Preferred stock redemption  (500) —  
     Common stock options exercised  876  2,006  
     Cash dividends paid on common stock  (1,457) (873) 
     Cash dividends paid on preferred stock  (364) (366) 
     Net cash provided by financing activities  154,694  183,521  
Increase in cash and cash equivalents  14,347  1,740  
Cash and cash equivalents at beginning of period  22,221  20,305  
Cash and cash equivalents at end of period  $36,568  $22,045  
Business comindation non-cash disclosures:  
     Assets acquired in business combination (net of cash received) $3,389  $—  
     Liabilities assumed in business combination  855  —  
Supplemental disclosure of cash flow information:  
     Loans transferred to other real estate owned  $79  $720  
     Initial recognition of operating lease right-of-use assets  12,935  —  
     Initial recognition of operating lease liabilities  15,659  —  
     Cashless stock options exercised  —  153  
     Restricted stock units vested  10  1  
     Common stock converted from subordinated debt  1,000  15,000  
Cash payments for:  
     Interest on deposits, repurchase agreements and borrowings  $19,387  $13,607  
     Income taxes  2,536  107  
See accompanying notes to unaudited consolidated financial statements.
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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 Potomac Mortgage Group (“PMG” which began doing business under the registered trade name “MVB Mortgage”), MVB Insurance, LLC (“MVB Insurance”), MVB Community Development Corporation (“CDC”), and ProCo Global, Inc. (“ProCo” which began doing business under the registered trade name Chartwell Compliance “Chartwell”).

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, 2018 has been derived from audited financial statements included in the Company’s 2018 filing on Form 10-K. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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, 2018, 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.

Accounting Changes

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). This pronouncement requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company adopted ASU 2016-02 as of the beginning of the period (January 1, 2019) and has not restated comparative periods. Of the optional practical expedients available under ASU 2016-02, all have been adopted. Upon adoption, the Company recognized right-of-use assets and related lease liabilities totaling $12.9 million and $15.7 million, respectively.

Certain of the Company's leases contain options to renew the lease; however, some of these renewal options are not included in the calculation of the lease liabilities as they are not reasonably expected to be exercised. The Company's leases do not contain residual value guarantees or material variable lease payments, and the Company does not have any material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.

9

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for as a lease.

The Company's leases are not complex; therefore, there were no significant assumptions or judgments made in applying the requirements of Topic 842, including the determination of whether the contracts contained a lease, the allocation of consideration in the contracts between lease and non-lease components, and the determination of the discount rates for the leases.

Note 2 – Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: a) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; b) the amount and timing of plan assets expected to be returned to the employer; c) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; d) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; e) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and f) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: x) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and y) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include removal, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: a) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, b) the policy for timing of transfers between levels, c) the valuation process for Level 3 fair value measurements, and d) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: a) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; b) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and c) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 will be effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In February 2018, the 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
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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 August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest-rate risk. The ASU eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The ASU also changes certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU in accordance with paragraph ASC 815-20-65-3 subpart C. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations and consolidated financial statements. The Company can now employ additional hedging strategies as described above, including the ability to apply fair value hedge accounting to a specified pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events. This allows the Company to better align its accounting and the financial reporting of its hedging activities with their economic objectives thereby reducing the earnings volatility resulting from these hedging activities.

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 is effective for fiscal years beginning after December 15, 2018, including all interim periods within those fiscal years. The adoption of this guidance was not material to the consolidated financial statements, as was always 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, Intangibles – Goodwill 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 beginning after December 15, 2019, including all interim periods within those fiscal years. The adoption of this guidance will not have a material impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and in May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, all of which clarifies codification and corrects unintended application of the guidance. 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 has formed an implementation team led by the CFO, that also includes other lines of business and functions within the
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Company. The Company has also 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 in the development of models that can meet the requirements of the new guidance. While this standard may potentially have a material impact on the Company’s consolidated financial statements, we are still in the process of completing our evaluation. In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year 2020, the proposed delay would be applicable. On October 16, 2019, the FASB approved its proposal to delay the effective date for for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities and plans to release a final ASU in mid-November.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance in September 2017, ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update), in January 2018, ASU 2018-10, Codification Improvements to Topic 842, Leases, also in July 2018, ASU 2018-11, Leases (Topic 842): Targeted Improvements, in December 2018, and in March 2019, ASU 2019-01, Leases (Topic 842): Codification Improvements. 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. ASU 2016-02 initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements, for Lessors which provides certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon the adoption of ASU 2016-02, ASU 2018-11, and ASU 2018-20 on January 1, 2019, the Company recognized right-of-use assets and related lease liabilities totaling $12.9 million and $15.7 million, respectively. The initial balance sheet gross up upon adoption was primarily related to operating leases of certain real estate properties and financing leases of certain office equipment. The Company has no material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company applied certain practical expedients provided under ASU 2016-02 whereby the Company did reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because this election resulted in a lower impact on our balance sheet. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11. See Note 5, “Premises and Equipment” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

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 (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; 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
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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 4) above, the Company discloses the fair value of its loan portfolio on a quarterly basis using an exit price notion. See Note 8, “Fair Value of Financial Instruments” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

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 also completed an evaluation of certain costs related to customer contracts and revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs previously recorded as expense are now recorded as contra-revenue). This classification change resulted in immaterial changes to both revenue and expense. The Company adopted the revenue recognition standard and its related amendments as of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the debit and credit card related cost reclassifications noted above.

Note 3 – Investment Securities

There were no held-to-maturity securities at September 30, 2019 or December 31, 2018.

Amortized cost and fair values of investment securities available-for-sale at September 30, 2019 are summarized as follows:
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
U. S. Agency securities$53,205  $283  $(218) $53,270  
U.S. Sponsored Mortgage-backed securities50,378  142  (538) 49,982  
Municipal securities108,361  3,693  (30) 112,024  
Total debt securities211,944  4,118  (786) 215,276  
Other securities10,663  128  (3) 10,788  
Total investment securities available-for-sale$222,607  4,246  $(789) $226,064  

Amortized cost and fair values of investment securities available-for-sale at December 31, 2018 are summarized as follows:
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
U. S. Agency securities$79,041  $14  $(1,625) $77,430  
U.S. Sponsored Mortgage-backed securities52,154  —  (2,039) 50,115  
Municipal securities84,747  206  (1,192) 83,761  
Total debt securities215,942  220  (4,856) 211,306  
Other securities10,308  68  (68) 10,308  
Total investment securities available-for-sale$226,250  $288  $(4,924) $221,614  

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The following table summarizes amortized cost and fair values of debt securities by maturity:
September 30, 2019
Available for sale
(Dollars in thousands)Amortized CostFair Value
Within one year$90  $(375) 
After one year, but within five18,959  19,079  
After five years, but within ten29,137  29,316  
After ten years163,758  167,256  
Total$211,944  $215,276  

Investment securities with a carrying value of $60.2 million at September 30, 2019, 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 September 30, 2019, the details of which are included in the following table. Although these securities, if sold at September 30, 2019 would result in a pretax loss of $789 thousand, 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 September 30, 2019, 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.

The following table discloses investments in an unrealized loss position at September 30, 2019:
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. Agency securities (26)$8,244  $(18) $23,455  $(200) 
U.S. Sponsored Mortgage-backed securities (33)4,175  (6) 32,237  (532) 
Municipal securities (6)2,173  (14) 831  (16) 
Other securities (1)—  —  510  (3) 
$14,592  $(38) $57,033  $(751) 

The following table discloses investments in an unrealized loss position at December 31, 2018:
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. Agency securities (54)$9,762  $(123) $63,740  $(1,502) 
U.S. Sponsored Mortgage-backed securities (42)2,360  (32) 47,755  (2,007) 
Municipal securities (78)5,936  (46) 35,955  (1,146) 
Other securities (2)2,452  (48) 1,018  (20) 
$20,510  $(249) $148,468  $(4,675) 

For the three-month periods ended September 30, 2019 and 2018, the Company sold investments available-for-sale of $380 thousand and $2.1 million, respectively. These sales resulted in gross gains of $0 and $27 thousand and gross losses of $11 thousand and $26 thousand, respectively.

For the three-month periods ended September 30, 2019 and 2018, the Company sold equity investments of $0 and $0, respectively.
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For the nine-month periods ended September 30, 2019 and 2018, the Company sold investments available-for-sale of $27.0 million and $2.8 million, respectively. These sales resulted in gross gains of $80 thousand and $352 thousand and gross losses of $259 thousand and $25 thousand, respectively.

For the nine-month periods ended September 30, 2019 and 2018, the Company sold equity investments of $6.0 million and $0, respectively. These sales resulted in gross gains of $0 and $0 and gross losses of $7 thousand and $0, respectively.

For the three and nine months ended September 30, 2019, the Company recognized unrealized holding gains of $0 and $13.8 million, respectively, on equity securities held as of September 30, 2019, which was recorded in noninterest income in the consolidated statements of income.

For the three and nine months ended September 30, 2018, the Company recognized unrealized holding losses of $623 thousand and $583 thousand, respectively, on equity securities held as of September 30, 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 Sheets at September 30, 2019 and December 31, 2018, were as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
Commercial and Non-Residential Real Estate$1,023,866  $941,033  
Residential Real Estate290,978  294,929  
Home Equity59,474  59,015  
Consumer7,972  9,605  
Total Loans$1,382,290  $1,304,582  
Deferred loan origination fees and costs, net85  (216) 
Loans receivable$1,382,375  $1,304,366  

For loans with maturities over one year, loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. For loans with a maturity of less than one year, loan origination fees and direct loan origination costs are recognized when incurred.

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 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 $2.5 million and $1.7 million, while the related reserves were $181 thousand and $218 thousand as of September 30, 2019 and December 31, 2018.

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.

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“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 September 30, 2019 and December 31, 2018, 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.

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 September 30, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
January 1, 2019$8,605  $1,405  $684  $245  $10,939  
     Charge-offs(666) —  —  (10) (676) 
     Recoveries1  1  2  50  54  
     Provision (recovery)1,721  (98) 60  (126) 1,557  
ALL balance at September 30, 2019$9,661  $1,308  $746  $159  $11,874  
Individually evaluated for impairment$1,515  $—  $—  $—  $1,515  
Collectively evaluated for impairment$8,146  $1,308  $746  $159  $10,359  

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(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at July 1, 2019$8,971  $1,229  $712  $256  $11,168  
     Charge-offs—  —  —  —  —  
     Recoveries—  —  —  49  49  
     Provision (recovery)690  79  34  (146) 657  
ALL balance at September 30, 2019$9,661  $1,308  $746  $159  $11,874  

The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$7,694  $2,351  $150  $36  $10,231  
     Collectively evaluated for impairment1,016,172  288,627  59,324  7,936  1,372,059  
Total Loans1,023,866  290,978  59,474  7,972  1,382,290  

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 September 30, 2018:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
January 1, 2018$7,804  $1,119  $705  $250  $9,878  
     Charge-offs(616) (11) —  (52) (679) 
     Recoveries10  19  58  5  92  
     Provision 1,827  242  (139) 218  2,148  
ALL balance at September 30, 2018$9,025  $1,369  $624  $421  $11,439  
Individually evaluated for impairment$1,262  $88  $—  $226  $1,576  
Collectively evaluated for impairment$7,763  $1,281  $624  $195  $9,863  

(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at July 1, 2018$8,664  $1,172  $602  $213  $10,651  
     Charge-offs(292) —  —  (2) (294) 
     Recoveries—  10  2  1  13  
     Provision (recovery)653  187  20  209  1,069  
ALL balance at September 30, 2018$9,025  $1,369  $624  $421  $11,439  

The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2018:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$11,704  $3,287  $111  $334  $15,436  
     Collectively evaluated for impairment917,580  295,462  57,518  10,129  1,280,689  
Total Loans$929,284  $298,749  $57,629  $10,463  $1,296,125  

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
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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.

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 September 30, 2019 and December 31, 2018:
 Impaired Loans with Specific AllowanceImpaired Loans with No Specific AllowanceTotal Impaired Loans
(Dollars in thousands)Recorded InvestmentRelated AllowanceRecorded InvestmentRecorded InvestmentUnpaid Principal Balance
September 30, 2019
Commercial
     Commercial Business$2,931  $1,141  $531  $3,462  $4,158  
     Commercial Real Estate812  366  1,298  2,110  2,188  
     Acquisition & Development1,723  8  399  2,122  3,513  
          Total Commercial5,466  1,515  2,228  7,694  9,859  
Residential—  —  2,351  2,351  2,426  
Home Equity—  —  150  150  155  
Consumer—  —  36  36  36  
          Total Impaired Loans$5,466  $1,515  $4,765  $10,231  $12,476  
December 31, 2018
Commercial
     Commercial Business$4,885  $668  $387  $5,272  $5,292  
     Commercial Real Estate1,842  375  396  2,238  2,300  
     Acquisition & Development—  —  2,224  2,224  3,601  
          Total Commercial6,727  1,043  3,007  9,734  11,193  
Residential—  —  2,831  2,831  2,882  
Home Equity—  —  123  123  123  
Consumer—  —  90  90  316  
          Total Impaired Loans$6,727  $1,043  $6,051  $12,778  $14,514  

Impaired loans have decreased by $2.5 million, or 19.9%, during the nine months ended September 30, 2019. This change is the net effect of multiple factors, including the identification of $924 thousand of impaired loans, payoffs of $1.5 million, partial charge offs of $676 thousand, the foreclosure of two unrelated commercial loans which required the reclassification of $79 thousand to other real estate owned, the reclassification of $1.4 million to performing loans based on improved repayment performance, and normal loan amortization.

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The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
Nine Months Ended September 30, 2019Three Months Ended September 30, 2019
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash BasisAverage Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$3,345  $—  $—  $3,003  $—  $—  
  Commercial Real Estate3,404  121  108  2,596  25  25  
  Acquisition & Development2,174  92  91  2,132  31  31  
    Total Commercial8,923  213  199  7,731  56  56  
Residential2,955  11  11  2,883  4  4  
Home Equity172  2  2  183  1  1  
Consumer46  —  —  36  —  —  
Total$12,096  $226  $212  $10,833  $61  $61  

Nine Months Ended September 30, 2018Three Months Ended September 30, 2018
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash BasisAverage Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$4,192  $119  $106  $3,917  $38  $2  
  Commercial Real Estate7,060  71  63  6,836  24  21  
  Acquisition & Development1,399  —  —  1,158  —  —  
    Total Commercial12,651  190  169  11,911  62  23  
Residential2,404  15  11  3,265  5  3  
Home Equity90  1  1  113  —  —  
Consumer139  —  —  233  —  —  
Total$15,284  $206  $181  $15,522  $67  $26  

As of September 30, 2019, the Bank’s other real estate owned balance totaled $1.4 million. The Bank held eleven foreclosed residential real estate properties representing $535 thousand, or 39%, 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 two properties for a total of $294 thousand, while the other included seven properties for a total of $163 thousand. The two remaining residential real estate properties, totaling $79 thousand, were the result of the foreclosure of two unrelated borrowers. The remaining $825 thousand, or 61%, of other real estate owned is the result of the foreclosure of two unrelated commercial development loans. There are eight additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $768 thousand as of September 30, 2019. These loans are included in the table above and have no specific allowance allocated to them.

As of September 30, 2018, the Bank's other real estate owned balance totaled $1.7 million. The Bank held eight foreclosed residential real estate properties representing $732 thousand, or 42%, 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 $174 thousand. The two remaining residential real estate properties, totaling $163 thousand, were result of the foreclosure of two unrelated borrowers. The remaining $1.0 million, or 58%, 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 $1.7 million as of September 30, 2018. These loans are included in the table above and have $88 thousand 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
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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.

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 September 30, 2019 and December 31, 2018:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
September 30, 2019
Commercial
     Commercial Business$476,569  $13,961  $13,836  $—  $504,366  
     Commercial Real Estate428,044  4,907  1,517  —  434,468  
     Acquisition & Development80,054  2,033  2,945  —  85,032  
          Total Commercial984,667  20,901  18,298  —  1,023,866  
Residential286,250  2,767  1,846  115  290,978  
Home Equity58,803  521  150  —  59,474  
Consumer7,805  138  29  —  7,972  
          Total Loans$1,337,525  $24,327  $20,323  $115  $1,382,290  
December 31, 2018
Commercial
     Commercial Business$432,589  $5,290  $5,652  $—  $443,531  
     Commercial Real Estate371,309  2,071  2,181  —  375,561  
     Acquisition & Development118,754  179  2,879  129  121,941  
          Total Commercial922,652  7,540  10,712  129  941,033  
Residential290,602  2,608  1,600  119  294,929  
Home Equity58,100  876  39  —  59,015  
Consumer9,359  164  19  63  9,605  
          Total Loans$1,280,713  $11,188  $12,370  $311  $1,304,582  

Loans classified as Special Mention totaled $24.3 million and $11.2 million as of September 30, 2019 and December 31, 2018, respectively. The increase of $13.1 million, or 117%, was concentrated in the commercial loan portfolio. This increase is primarily the result of the risk grade downgrade of four loans to unrelated borrowers, totaling $16.5 million, the payoff of an existing loan in the amount of $2.4 million, and normal loan amortization of the loans in the classification. Of the four loans recently classified as Special Mention, the largest balance of $8.3 million, or 63.4% of the increase, is a note secured by subordinate bonds related to a sales-tax increment financing district, which have not been refinanced as timely as anticipated due to delays in the reissuance of senior position bonds. Ongoing development of the district is expected to allow for the refinance of the subordinate bonds in 2020. A second loan, in the amount of $3.4 million, is secured by a senior care facility which has
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continued to supplement operating results with its liquid assets. Recent changes to its revenue strategy are expected to result in improved performance. A third loan, in the amount of $2.9 million, is secured by a multifamily rental property that has not performed as intended due to a lack of demand from a nearby university. The property is being remarketed to area professionals and is expected to report improved performance. The last of the four loans is a $2.0 million note secured by residential lots adjacent to a hotel resort property. The loan is amortizing and has paid as agreed, however, the risk grade was adjusted due to potential legal issues associated with the primary guarantor. These matters are being monitored and any significant developments will result in reevaluation of the risk grades.

Loans classified as Substandard totaled $20.3 million and $12.4 million as of September 30, 2019 and December 31, 2018, respectively. The increase of $7.9 million, or 64%, was concentrated in the commercial loan portfolio. The increase is primarily the result of the risk grade downgrade of four loans to two unrelated borrowers, totaling $9.6 million, the risk grade upgrade of a $1.0 million loan, and the payoff of two existing loans totaling $1.4 million. Of the four loans recently classified as Substandard, three loans totaling $6.9 million were each provided to a single borrower to finance the acquisition of equipment to be used in the coal industry. Repayment performance has been unsatisfactory and there are no significant expectations of improvement within the industry. The fourth loan, in the amount of $2.7 million, is secured by a senior care facility that has struggled to collect its receivables and government reimbursements in a timely manner, which has placed considerable strain on operating performance, which are not expected to be corrected in the short term. These matters are being monitored and any significant developments will result in reevaluation of the risk grades.

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 Management Loan Committee (“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.
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The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and non-accrual loans as of September 30, 2019 and December 31, 2018:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal LoansNon-Accrual90+ Days Still Accruing
September 30, 2019
Commercial
     Commercial Business$501,063  $255  $308  $2,740  $3,303  $504,366  $3,059  $—  
     Commercial Real Estate434,309  159  —  —  159  434,468  303  —  
     Acquisition & Development84,749  —  —  283  283  85,032  399  —  
          Total Commercial1,020,121  414  308  3,023  3,745  1,023,866  3,761  —  
Residential289,432  —  615  931  1,546  290,978  1,724  —  
Home Equity59,196  153  13  112  278  59,474  112  —  
Consumer7,851  78  20  23  121  7,972  30  —  
          Total Loans$1,376,600  $645  $956  $4,089  $5,690  $1,382,290  $5,627  $—  
December 31, 2018
Commercial
     Commercial Business$432,097  $6,380  $1,746  $3,308  $11,434  $443,531  $3,684  $—  
     Commercial Real Estate374,880  681  —  —  681  375,561  385  —  
     Acquisition & Development121,644  —  —  297  297  121,941  426  —  
          Total Commercial928,621  7,061  1,746  3,605  12,412  941,033  4,495  —  
Residential291,665  1,000  760  1,504  3,264  294,929  2,442  —  
Home Equity58,575  400  40  —  440  59,015  84  —  
Consumer9,485  28  10  82  120  9,605  82  —  
          Total Loans$1,288,346  $8,489  $2,556  $5,191  $16,236  $1,304,582  $7,103  $—  

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 September 30, 2019 and December 31, 2018, the Bank had specific reserve allocations for TDR’s of $1.5 million and $439 thousand, respectively.

Loans considered to be troubled debt restructured loans totaled $7.8 million and $8.0 million as of September 30, 2019 and December 31, 2018, respectively. Of these totals, $4.6 million and $4.2 million, respectively, represent accruing troubled debt restructured loans and represent 45% and 33%, respectively of total impaired loans. Meanwhile, as of September 30, 2019, $3.1 million represents three loans to two borrowers that have defaulted under the restructured terms. Two of the three loans, totaling $400 thousand, 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. The third loan, to an unrelated borrower, is a $2.7 million commercial term loan which was previously considered a TDR due to multiple interest only periods being provided. This loan defaulted during the three months ended September 30, 2018. The default is due to delayed payments stemming from ongoing negotiations with respect to a third-party operator that is expected to provide a new source of reliable cash flow to service the required payments of this loan. These negotiations continue as of September 30, 2019. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of September 30, 2019 and December 31, 2018.

Two unrelated commercial loans totaling $272 thousand, and two unrelated consumer loans totaling $49 thousand, were classified as TDR’s in the nine months ended September 30, 2018. Upon the identification of financial difficulties on the part of the borrowers, one of these loans was modified to allow for extended interest-only payments, while the other was modified to lower loan principal and interest payments. These loans have paid as agreed under their modified terms. Two unrelated commercial loans totaling $336 thousand, and two unrelated residential real estate loans totaling $227 thousand, were classified as TDR’s during the six months ended September 30, 2019. Upon the identification of financial difficulties on the part of the borrowers,
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these loans were modified to lower loan payments by lengthening the amortization period beyond what is typical for a commercial loan of this type. These loans have paid as agreed since they were renewed under modified terms.

New TDR's 1
Nine Months Ended September 30, 2019Three Months Ended September 30, 2019
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business2  $336  $333  —  $—  $—  
     Commercial Real Estate—  —  —  —  —  —  
     Acquisition & Development—  —  —  —  —  —  
          Total Commercial2  336  333  —  —  —  
Residential2  227  255  2  227  255  
Home Equity—  —  —  —  —  —  
Consumer—  —  —  —  —  —  
          Total4  $563  $588  2  $227  $255  

Nine Months Ended September 30, 2018Three Months Ended September 30, 2018
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business2  $272  $272  —  $—  $—  
     Commercial Real Estate—  —  —  —  —  —  
     Acquisition & Development—  —  —  —  —  —  
          Total Commercial2  272  272  —  —  —  
Residential—  —  —  —  —  —  
Home Equity1  39  39  —  —  —  
Consumer1  10  10  —  —  —  
          Total4  $321  $321  —  $—  $—  

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

Note 5 – Premises and Equipment

The Company leases certain premises and equipment under operating and finance leases. At September 30, 2019, the Company had lease liabilities totaling $15.3 million and right-of-use assets totaling $12.9 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the nine months ended September 30, 2019, the weighted average remaining lease term for finance leases was 2.9 years and the weighted average discount rate used in the measurement of finance lease liabilities was 2.81%. For the three months ended September 30, 2019, the weighted average remaining lease term for finance leases was 2.9 years and the weighted average discount rate used in the measurement of finance lease liabilities was 2.81%. For the nine months ended September 30, 2019, the weighted average remaining lease term for operating leases was 11.9 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.53%. For the three months ended September 30, 2019, the weighted average remaining lease term for operating leases was 11.9 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.53%.

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Lease costs were as follows:
(Dollars in thousands)Nine Months Ended September 30, 2019Three Months Ended September 30, 2019
Amortization of right-of-use assets, finance leases$58  $18  
Interest on lease liabilities, finance leases62
Operating lease cost1,489  482
Short-term lease cost5716
Variable lease cost3010
Total lease cost$1,640  $528  

Rent expense for the three and nine months ended September 30, 2018, prior to the adoption of ASU 2016-02, was $503 thousand and $1.5 million, respectively.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the nine months ended September 30, 2019. At September 30, 2019, the Company had leases that had not commenced that will create approximately $2.4 million and $4.1 million of additional lease liabilities and right-of-use assets, respectively, for the Company.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as follows:
September 30, 2019
(Dollars in thousands)Finance Leases  Operating Leases  
2019$84  $1,917  
202084  1,794  
202177  1,790  
20221  1,529  
2023—  1,381  
2024 and thereafter—  10,416  
Total future minimum lease payments$246  $18,827  
Less: Amounts representing interest(10) (3,785) 
Present value of net future minimum lease payments$236  $15,042  


Note 6 – Deposits

Deposits were as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
Noninterest-bearing demand$274,970  $213,597  
Interest-bearing demand426,783  376,398  
Savings and money markets374,511  317,697  
Time deposits, including CDs and IRAs380,140  401,462  
Total deposits$1,456,404  $1,309,154  
Time deposits that meet or exceed the FDIC insurance limit$12,458  $15,280  

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Maturities of time deposits were as follows:
(Dollars in thousands)September 30, 2019
2019$182,232  
2020135,953  
202116,943  
202223,655  
202321,357  
Total$380,140  

Note 7 – Borrowed Funds

Short-term borrowings

Along with traditional deposits, the Bank has access to short-term borrowings from the FHLB, Federal Reserve discount window borrowings, and Fed Funds purchased from correspondent banks to fund its operations and investments. Short-term borrowings totaled $240.8 million at September 30, 2019, compared to $212.4 million at December 31, 2018.

Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
Balance at end of period$240,811  $212,395  
Average balance during the period215,921  171,117  
Maximum month-end balance240,811  264,297  
Weighted-average rate during the year2.40 %2.27 %
Weighted-average rate at end of period2.08 %2.62 %
Repurchase agreements

Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase “repurchase agreements” with customers representing 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 September 30, 2019 and December 31, 2018. These borrowings were collateralized with investment securities with a carrying value of $9.8 million and $15.4 million at September 30, 2019 and December 31, 2018, 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 $9.5 million at September 30, 2019, compared to $14.9 million at December 31, 2018.

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Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
Balance at end of period$9,460  $14,925  
Average balance during the period9,493  18,536  
Maximum month-end balance14,655  20,903  
Weighted-average rate during the year0.47 %0.30 %
Weighted-average rate at end of period0.48 %0.16 %

Long-term notes from the FHLB were as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
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$830  $1,741  
Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly installments of $5 thousand, including interest of 5.22%—  751  
 $830  $2,492  
Subordinated Debt

Information related to subordinated debt is summarized as follows:
(Dollars in thousands)September 30, 2019December 31, 2018
Balance at end of period$4,124  $17,524  
Average balance during the period9,535  25,774  
Maximum month-end balance17,524  33,524  
Weighted-average rate during the year6.55 %6.81 %
Weighted-average rate at end of period3.74 %6.57 %

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
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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 5 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 5-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 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. As of September 30, 2019, all subordinated debt notes have been converted or redeemed.

The Company reflects subordinated debt in the amount of $4.1 million as of September 30, 2019 and $17.5 million as of December 31, 2018 and interest expense of $728 thousand and $1.4 million for the nine months ended September 30, 2019 and 2018.

In 2018, $16.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 1,000,000 new shares and provided an annual interest expense savings of $1.1 million.

During the nine months ended September 30, 2019, $1.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 62,500 new shares, and $12.4 million of subordinated debt was redeemed. These transactions provided an annual interest expense savings of $970 thousand.

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A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
YearAmount
2019$240,818  
202030  
202132  
2022761  
2023—  
Thereafter4,124  
 $245,765  

Note 8 – 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 hierarchical 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 2018 Annual Report on Form 10-K, except for the valuation of loans held for investment which was impacted 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 III classification.

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 or nine months ended September 30, 2019. Valuation techniques are consistent with techniques used in prior periods. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments.

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•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.

•Fair value hedge – Treated like an interest rate swap, fair value hedges 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.


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The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2019 and December 31, 2018 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.
 September 30, 2019
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $53,270  $—  $53,270  
     U.S. Sponsored Mortgage backed securities—  49,982  —  49,982  
     Municipal securities—  76,575  35,449  112,024  
     Other securities—  10,788  —  10,788  
     Loans held for sale—  159,961  —  159,961  
     Interest rate lock commitment—  —  2,315  2,315  
     Interest rate swap—  6,695  —  6,695  
     Fair value hedge—  846  —  846  
Liabilities:
     Interest rate swap—  6,695  —  6,695  
     Fair value hedge—  1,988  —  1,988  
     Mortgage-backed security hedges—  231  —  231  

 December 31, 2018
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $77,430  $—  $77,430  
     U.S. Sponsored Mortgage backed securities—  50,115  —  50,115  
     Municipal securities—  50,639  33,122  83,761  
     Other securities—  10,308  —  10,308  
     Equity securities6,027  3,272  300  9,599  
     Loans held for sale—  75,807  —  75,807  
     Interest rate lock commitment—  —  1,750  1,750  
     Interest rate swap—  1,375  —  1,375  
     Interest rate cap—  8  —  8  
Liabilities:
     Interest rate swap—  1,375  —  1,375  
     Fair value hedge—  343  —  343  
     Mortgage-backed security hedges—  853  —  853  

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The following table represents recurring level III assets:
(Dollars in thousands)Interest Rate Lock CommitmentsMunicipal SecuritiesEquity SecuritiesTotal
Balance at January 1, 2019$1,750  $33,122  $300  $35,172  
Realized and unrealized gains included in earnings565  —  —  565  
Purchase of securities—  682  1,300  1,982  
Unrealized gain included in other comprehensive income (loss)—  10,707  16,814  27,521  
Unrealized loss included in other comprehensive income (loss)—  (9,062) —  (9,062) 
Balance at September 30, 2019$2,315  $35,449  $18,414  $56,178  
Balance at July 1, 2019$2,541  $30,537  $1,550  $34,628  
Realized and unrealized gains included in earnings(226) —  —  (226) 
Purchase of securities—  573  50  623  
Unrealized gain included in other comprehensive income (loss)—  4,339  16,814  21,153  
Unrealized loss included in other comprehensive income (loss)—  —  —  —  
Balance at September 30, 2019$2,315  $35,449  $18,414  $56,178  
Balance at January 1, 2018$1,426  $22,909  $900  $25,235  
Realized and unrealized gains included in earnings246  —  672  918  
Purchase of securities—  6,232  2,000  8,232  
Unrealized gain included in other comprehensive income (loss)—  1,541  —  1,541  
Unrealized loss included in other comprehensive income (loss)—  (1,358) —  (1,358) 
Balance at September 30, 2018$1,672  $29,324  $3,572  $34,568  
Balance at July 1, 2018$2,375  $28,173  $900  $31,448  
Realized and unrealized losses included in earnings(703) —  672  (31) 
Purchase of securities—  —  2,000  2,000  
Unrealized gain included in other comprehensive income (loss)—  1,787  —  1,787  
Unrealized loss included in other comprehensive income (loss)—  (636) —  (636) 
Balance at September 30, 2018$1,672  $29,324  $3,572  $34,568  

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 2019 and 2018 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.

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•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.

•Equity securities – Equity securities are recorded at fair value on a nonrecurring 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. The valuation methodologies utilized may include significant unobservable inputs. There have been no changes in valuation techniques for the three or nine months ended September 30, 2019. Valuation techniques are consistent with techniques used in prior periods.

Assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are included in the table below:
September 30, 2019
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$—  $—  $8,716  $8,716  
Other real estate owned—  —  1,361  1,361  
Equity securities—  —  18,414  18,414  

December 31, 2018
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$—  $—  $11,735  $11,735  
Other real estate owned—  —  2,145  2,145  

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The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at September 30, 2019 and December 31, 2018.
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
September 30, 2019
Nonrecurring measurements:
Impaired loans$8,716  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$1,361  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Recurring measurements:
Municipal securities (Local TIF bonds)$35,449  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%  
Equity securities$18,414  Net asset valueCost minus impairment0%
Interest rate lock commitments$2,315  Pricing modelPull through rates77% - 82%  
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
December 31, 2018
Nonrecurring measurements:
Impaired loans$11,735  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$2,145  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Recurring measurements:
Municipal securities (Local TIF bonds)$33,122  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%  
Equity securities$300  Net asset valueCost minus impairment0%
Interest rate lock commitments$1,750  Pricing modelPull through rates80% - 88%  
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 value of financial instruments 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.
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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 ValueEstimated Fair ValueQuoted Prices in Active Markets for Identical Assets (Level I)Significant Other Observable Inputs (Level II)Significant Unobservable Inputs (Level III)
September 30, 2019
Financial assets:
     Cash and cash equivalents$36,568  $36,568  $36,568  $—  $—  
     Certificates of deposits with other banks13,541  13,540  —  13,540  —  
     Securities available-for-sale225,218  225,218  —  189,769  35,449  
     Equity securities18,414  18,414  —  —  18,414  
     Loans held for sale159,961  159,961  —  159,961  —  
     Loans, net1,370,501  1,371,646  —  —  1,371,646  
     Mortgage servicing rights315  315  —  —  315  
     Interest rate lock commitment2,315  2,315  —  —  2,315  
     Interest rate swap6,695  6,695  —  6,695  —  
     Accrued interest receivable7,585  7,585  —  1,800  5,785  
Financial liabilities:
     Deposits$1,456,404  $1,421,521  $—  $1,421,521  $—  
     Repurchase agreements9,460  9,460  —  9,460  —  
     FHLB and other borrowings241,641  241,641  —  241,641  —  
     Mortgage-backed security hedges231  231  —  231  —  
     Interest rate swap6,695  6,695  —  6,695  —  
     Fair value hedge1,988  1,988  —  1,988  —  
     Accrued interest payable1,018  1,018  —  1,018  —  
     Subordinated debt4,124  4,124  —  4,124  —  
December 31, 2018
Financial assets:
     Cash and cash equivalents$22,221  $22,221  $22,221  $—  $—  
     Certificates of deposits with other banks14,778  14,300  —  14,300  —  
     Securities available-for-sale221,614  221,614  —  188,492  33,122  
     Equity securities9,599  9,599  6,027  3,272  300  
     Loans held for sale75,807  75,807  —  75,807  —  
     Loans, net1,293,427  1,276,065  —  —  1,276,065  
     Mortgage servicing rights173  173  —  —  173  
     Interest rate lock commitment1,750  1,750  —  —  1,750  
     Interest rate swap1,375  1,375  —  1,375  —  
     Interest rate cap8  8  —  8  —  
     Accrued interest receivable7,710  7,710  —  1,368  6,342  
Financial liabilities:
     Deposits$1,309,154  $1,249,164  $—  $1,249,164  $—  
     Repurchase agreements14,925  14,925  —  14,925  —  
     FHLB and other borrowings214,887  214,969  —  214,969  —  
     Mortgage-backed security hedges853  853  —  853  —  
     Interest rate swap1,375  1,375  —  1,375  —  
     Fair value hedge343  343  —  343  —  
     Accrued interest payable1,064  1,064  —  1,064  —  
     Subordinated debt17,524  18,250  —  18,250  —  

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
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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 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 9 – 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 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 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 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 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
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required by law. The proceeds of these preferred stock offerings will be used to support continued growth of the Company and its subsidiaries.

On August 27, 2019, the Company redeemed preferred stock in the amount of $500 thousand.

Note 10 – 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.
 Nine Months Ended September 30Three Months Ended September 30
(Dollars in thousands except shares and per share data)2019201820192018
Numerator for basic earnings per share:
Net income from continuing operations$22,469  $9,004  $4,346  $3,579  
Less: Dividends on preferred stock364  366  121  123  
Net income from continuing operations available to common shareholders - basic22,105  8,638  4,225  3,456  
Net income from discontinued operations available to common shareholders - basic and diluted427  —  (19) —  
Net income available to common shareholders$22,532  $8,638  $4,206  $3,456  
Numerator for diluted earnings per share:
Net income from continuing operations available to common shareholders - basic$22,105  $8,638  $4,225  $3,456  
Add: Dividends on convertible preferred stock—  366  —  123  
Add: Interest on subordinated debt (tax effected)—  —  —  228  
Net income from continuing operations available to common shareholders - diluted$22,105  $9,004  $4,225  $3,807  
Denominator:
Total average shares outstanding11,661,581  10,845,166  11,731,774  11,416,202  
Effect of dilutive convertible preferred stock—  489,625  —  489,625  
Effect of dilutive convertible subordinated debt—  —  —  900,000  
Effect of dilutive stock options and restricted stock units295,804  355,523  366,561  307,432  
Total diluted average shares outstanding11,957,385  11,690,314  12,098,335  13,113,259  
Earnings per share from continuing operations - basic$1.89  $0.80  $0.36  $0.30  
Earnings per share from discontinued operations - basic$0.04  $—  $—  $—  
Earnings per share - basic$1.93  $0.80  $0.36  $0.30  
Earnings per share from continuing operations - diluted$1.84  $0.77  $0.35  $0.29  
Earnings per share from discontinued operations - diluted$0.04  $—  $—  $—  
Earnings per share - diluted$1.88  $0.77  $0.35  $0.29  

For the three months ended September 30, 2019 and 2018, approximately 389 and 377 thousand, respectively, 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 nine months ended September 30, 2019 and 2018, approximately 396 thousand and 1.2 million, respectively, options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.

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For the three months ended September 30, 2019 and 2018, approximately 116 and 54 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the nine months ended September 30, 2019 and 2018, approximately 137 and 44 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

Note 11 – 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. The fintech division and Chartwell reside in the commercial and retail banking segment. 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.

On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI purchased substantially all of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million, as discussed in Note 15, “Discontinued Operations” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. MVB Insurance retained the assets related to, and continues to operate, its title insurance business. The title insurance business is immaterial in terms of revenue.

Based on a measurement period that ended June 30, 2019, the Company has earned and is reasonably assured to receive an earn-out payment related to the Asset Purchase Agreement with USI. As of June 30, 2019, the Company estimated the earn-out payment to be $600 thousand. This estimate recorded as contingent consideration from discontinued operations. On August 27, 2019, the Company adjusted the estimate recorded in the second quarter of 2019 to match the earn-out payment received of $575 thousand.

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Information about the reportable segments and reconciliation to the consolidated financial statements for the three month periods ended September 30, 2019 and September 30, 2018 are as follows:

Three Months Ended September 30, 2019Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$19,299  $2,288  $9  $(558) $21,038  
Interest expense4,806  1,811  156  (769) 6,004  
Net interest income14,493  477  (147) 211  15,034  
Provision for loan losses625  32  —  —  657  
Net interest income after provision for loan losses13,868  445  (147) 211  14,377  
Noninterest Income:
Mortgage fee income121  11,587  —  (212) 11,496  
Other income2,138  1,112  1,516  (1,566) 3,200  
Total noninterest income2,259  12,699  1,516  (1,778) 14,696  
Noninterest Expenses:         
Salaries and employee benefits4,820  8,318  2,300  —  15,438  
Other expense6,113  2,142  1,254  (1,567) 7,942  
Total noninterest expenses10,933  10,460  3,554  (1,567) 23,380  
Income (loss) from continuing operations, before income taxes5,194  2,684  (2,185) —  5,693  
Income tax expense (benefit) - continuing operations1,130  725  (508) —  1,347  
Net income (loss) from continuing operations4,064  1,959  (1,677) —  4,346  
Income (loss) from discontinued operations, before income taxes—  —  (25) —  (25) 
Income tax expense (benefit) - discontinued operations—  —  (6) —  (6) 
Net income (loss) from discontinued operations—  —  (19) —  (19) 
Net income (loss)$4,064  $1,959  $(1,696) $—  $4,327  
Preferred stock dividends—  —  121  —  121  
Net income (loss) available to common shareholders$4,064  $1,959  $(1,817) $—  $4,206  
Capital Expenditures for the three month period ended September 30, 2019$412  $56  $37  $—  $505  
Total Assets as of September 30, 20191,959,817  272,007  210,715  (480,587) 1,961,952  
Total Assets as of December 31, 20181,753,932  165,430  196,537  (364,930) 1,750,969  
Goodwill as of September 30, 20192,748  16,882  —  —  19,630  
Goodwill as of December 31, 20181,598  16,882  —  —  18,480  

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Three Months Ended September 30, 2018Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$16,506  $1,763  $1  $(94) $18,176  
Interest expense3,664  1,138  333  (483) 4,652  
Net interest income12,842  625  (332) 389  13,524  
Provision for loan losses1,025  44  —  —  1,069  
Net interest income after provision for loan losses11,817  581  (332) 389  12,455  
Noninterest income:
Mortgage fee income152  9,246  —  (390) 9,008  
Other income2,203  (738) 1,706  (1,668) 1,503  
Total noninterest income2,355  8,508  1,706  (2,058) 10,511  
Noninterest Expense:
Salaries and employee benefits3,493  6,047  1,980  —  11,520  
Other expense5,274  2,147  1,145  (1,669) 6,897  
Total noninterest expenses8,767  8,194  3,125  (1,669) 18,417  
Income (loss) from continuing operations, before income taxes5,405  895  (1,751) —  4,549  
Income tax expense (benefit) - continuing operations1,121  229  (380) —  970  
Net income (loss) from continuing operations4,284  666  (1,371) —  3,579  
Income from discontinued operations, before income taxes—  —  —  —  —  
Income tax expense - discontinued operations—  —  —  —  —  
Net income from discontinued operations—  —  —  —  —  
Net income (loss)$4,284  $666  $(1,371) $—  $3,579  
Preferred stock dividends—  —  123  —  123  
Net income (loss) available to common shareholders$4,284  $666  $(1,494) $—  $3,456  
Capital Expenditures for the three month period ended September 30, 2018$808  $128  $65  $—  $1,001  
Total Assets as of September 30, 20181,722,542  170,931  191,033  (361,402) 1,723,104  
Total Assets as of December 31, 20171,531,496  149,323  184,599  (331,116) 1,534,302  
Goodwill as of September 30, 20181,598  16,882  —  —  18,480  
Goodwill as of December 31, 20171,598  16,882  —  —  18,480  

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Nine Months Ended September 30, 2019Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$56,446  $5,858  $12  $(1,185) $61,131  
Interest expense14,303  4,303  728  (1,738) 17,596  
Net interest income42,143  1,555  (716) 553  43,535  
Provision for loan losses1,497  60  —  —  1,557  
Net interest income after provision for loan losses40,646  1,495  (716) 553  41,978  
Noninterest Income:
Mortgage fee income507  28,076  —  (553) 28,030  
Other income19,168  2,723  4,790  (4,863) 21,818  
Total noninterest income19,675  30,799  4,790  (5,416) 49,848  
Noninterest Expenses:
Salaries and employee benefits13,435  20,515  6,502  —  40,452  
Other expense16,958  6,009  3,662  (4,863) 21,766  
Total noninterest expenses30,393  26,524  10,164  (4,863) 62,218  
Income (loss) from continuing operations, before income taxes29,928  5,770  (6,090) —  29,608  
Income tax expense (benefit) - continuing operations6,969  1,574  (1,404) —  7,139  
Net income (loss) from continuing operations22,959  4,196  (4,686) —  22,469  
Income (loss) from discontinued operations, before income taxes—  —  575  —  575  
Income tax expense (benefit) - discontinued operations—  —  148  —  148  
Net income (loss) from discontinued operations—  —  427  —  427  
Net income (loss)$22,959  $4,196  $(4,259) $—  $22,896  
Preferred stock dividends—  —  364  —  364  
Net income (loss) available to common shareholders$22,959  $4,196  $(4,623) $—  $22,532  
Capital Expenditures for the nine month period ended September 30, 2019$915  $83  $136  $—  $1,134  
Total Assets as of September 30, 20191,959,817  272,007  210,715  (480,587) 1,961,952  
Total Assets as of December 31, 20181,753,932  165,430  196,537  (364,930) 1,750,969  
Goodwill as of September 30, 20192,748  16,882  —  —  19,630  
Goodwill as of December 31, 20181,598  16,882  —  —  18,480  

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Nine Months Ended September 30, 2018Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$45,772  $4,870  $3  $(471) $50,174  
Interest expense9,503  2,945  1,433  (1,351) 12,530  
Net interest income36,269  1,925  (1,430) 880  37,644  
Provision for loan losses2,067  81  —  —  2,148  
Net interest income after provision for loan losses34,202  1,844  (1,430) 880  35,496  
Noninterest Income:
Mortgage fee income444  25,071  —  (881) 24,634  
Other income5,052  485  4,748  (4,574) 5,711  
Total noninterest income5,496  25,556  4,748  (5,455) 30,345  
Noninterest Expenses:
Salaries and employee benefits10,946  18,289  5,252  —  34,487  
Other expense14,803  6,566  3,124  (4,575) 19,918  
Total noninterest expenses25,749  24,855  8,376  (4,575) 54,405  
Income (loss) from continuing operations, before income taxes13,949  2,545  (5,058) —  11,436  
Income tax expense (benefit) - continuing operations2,932  654  (1,154) —  2,432  
Net income (loss) from continuing operations11,017  1,891  (3,904) —  9,004  
Income from discontinued operations, before income taxes—  —  —  —  —  
Income tax expense - discontinued operations—  —  —  —  —  
Net income from discontinued operations—  —  —  —  —  
Net income (loss)$11,017  $1,891  $(3,904) $—  $9,004  
Preferred stock dividends—  —  366  —  366  
Net income (loss) available to common shareholders$11,017  $1,891  $(4,270) $—  $8,638  
Capital Expenditures for the three month period ended September 30, 2018$1,820  $235  $109  $—  $2,164  
Total Assets as of September 30, 20181,722,542  170,931  191,033  (361,402) 1,723,104  
Total Assets as of December 31, 20171,531,496  149,323  184,599  (331,116) 1,534,302  
Goodwill as of September 30, 20181,598  16,882  —  —  18,480  
Goodwill as of December 31, 20171,598  16,882  —  —  18,480  


Commercial & Retail Banking

For the three months ended September 30, 2019, the Commercial & Retail Banking segment earned $4.1 million compared to $4.3 million in 2018. Net interest income increased by $1.7 million, primarily the result of an increase of $2.8 million in interest and fees on loans, which was partially offset by an increase of $1.3 million in interest on deposits. The increase in interest and fees on loans was the result of an increase of $167.9 million in the average balance of loans. The increase in interest on deposits was the result of an increase of $71.3 million in the average balance of deposits. Noninterest income decreased by $296 thousand which was the result of a decrease of $624 thousand in the holding gain on equity securities and a decrease of $297 thousand in the income on bank-owned life insurance. These decreases were partially offset by an increase of $623 thousand in commercial swap fee income. Noninterest expense increased by $2.2 million, primarily the result of an increase of $1.3 million in salaries and employee benefits expense, an increase of $338 thousand in professional fees, an increase of $244 thousand in occupancy and equipment expense, an increase of $158 thousand in marketing, contributions, and sponsorships, and an increase of $111 thousand in travel, entertainment, dues, and subscriptions. The increase in salaries and employee benefits expense is primarily the result of the build out of the Fintech team. In addition, provision expense decreased $400 thousand due to the result of the net impact of
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changes in outstanding loan portfolios, changes in the level of recognized charge offs, changes in historical loss rates, and changes in the level of specific loan loss allocations.

For the nine months ended September 30, 2019, the Commercial & Retail Banking segment earned $23.0 million compared to $11.0 million in 2018. Net interest income increased by $5.9 million, primarily the result of an increase of $10.4 million in interest and fees on loans, which was partially offset by an increase of $5.2 million in interest on deposits. The increase in interest and fees on loans was the result of an increase of $188.7 million in the average balance of loans. The increase in interest on deposits was the result of an increase of $109.5 million in the average balance of deposits. Noninterest income increased by $13.6 million which was the result of an increase of $13.1 million in the holding gain on equity securities and an increase of $727 thousand in commercial swap fee income. Noninterest expense increased by $4.6 million, primarily the result of an increase of $2.5 million in salaries and employee benefits expense, an increase of $678 thousand in occupancy and equipment expense, an increase of $480 thousand in other operating expenses, an increase of $471 thousand in professional fees, an increase of $259 thousand in travel, entertainment, dues, and subscriptions, an increase of $214 thousand in data processing and communications expense, and an increase of $107 thousand in insurance tax, and assessment expense. In addition, provision expense decreased $570 thousand due to the result of the net impact of changes in outstanding loan portfolios, changes in the level of recognized charge offs, changes in historical loss rates, and changes in the level of specific loan loss allocations.

Mortgage Banking

For the three months ended September 30, 2019, the Mortgage Banking segment earned $2.0 million compared to $666 thousand in 2018. Net interest income decreased $148 thousand, which was the result of an increase of $673 thousand in interest on FHLB and other borrowings, which was partially offset by an increase of $525 thousand in interest and fees on loans. The increase in interest on FHLB and other borrowings was due to an increase of $53.0 million in average borrowings and an increase in short-term borrowing rates. Noninterest income increased by $4.2 million, primarily the result of an increase of $2.3 million in mortgage fee income and an increase of $1.9 million in the gain on derivative. The increase in mortgage fee income was driven by the increase in mortgage closed production volume, which increased by $192.4 million, or 51.7% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase in the gain on derivatives was largely the result of a $49.3 million increase in the derivative asset, as the locked pipeline of residential mortgage loans related to the derivative asset decreased 1.1% in the third quarter of 2019 compared to a decrease of 19.6% in the third quarter of 2018. Noninterest expense increased by $2.3 million, which was the result of an increase of $2.3 million in salaries and employee benefits expense, due to an increase in mortgage production.

For the nine months ended September 30, 2019, the Mortgage Banking segment earned $4.2 million compared to $1.9 million in 2018. Net interest income decreased by $370 thousand, primarily the result of an increase of $1.4 million in the interest on FHLB and other borrowings, which was partially offset by an increase of $988 thousand in interest and fees on loans. The increase in interest on FHLB and other borrowings was due to an increase of $26.5 million in average borrowings and an increase in short-term borrowing rates. Noninterest income increased by $5.2 million, primarily the result of an increase of $3.0 million in mortgage fee income and an increase of $2.2 million in gain on derivatives. The increase in mortgage fee income was driven by the increase in mortgage closed production volume, which increased by $200.2 million or 18.1% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in gain on derivatives of $2.2 million, was largely the result of a 94.1% increase in the locked mortgage pipeline for the nine months ended September 30, 2019 compared to a 34.0% increase in the locked mortgage pipeline for the nine months ended September 30, 2018. Noninterest expense increased by $1.7 million, which was the result of an increase of $2.2 million in salaries and employees benefits expense and an increase of $424 thousand in travel, entertainment, dues, and subscriptions. These increases were partially offset by a decrease of $498 thousand in mortgage processing expense, a decrease of $241 thousand in occupancy and equipment expense, and a decrease of $110 thousand in professional fees.

Financial Holding Company

For the three months ended September 30, 2019, excluding discontinued operations, the Financial Holding Company segment lost $1.7 million compared to a loss of $1.4 million in 2018. Interest expense decreased $177 thousand, noninterest income decreased $190 thousand, and noninterest expense increased $429 thousand. In addition, the income tax benefit increased $128 thousand. The decrease in interest expense was due to a $177 thousand decrease in interest on subordinated debt. The increase in noninterest income was primarily the result of an decrease of $103 thousand in intercompany services income related to Regulation W and a decrease of $113 thousand in other operating income. The increase in noninterest expense was primarily the result of an increase of $320 thousand in salaries and employee benefits expenses and an increase of $109 thousand in other operating expenses.

For the nine months ended September 30, 2019, excluding discontinued operations, the Financial Holding Company segment lost
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$4.7 million compared to a loss of $3.9 million in 2018. Interest expense decreased $705 thousand, noninterest income increased $42 thousand, and noninterest expense increased $1.8 million. In addition, the income tax benefit decreased $250 thousand. The decrease in interest expense was due to a $705 thousand decrease in interest on subordinated debt. The increase in noninterest income was primarily the result of an increase of $289 thousand in intercompany services income related to Regulation W and an increase of $46 thousand in the holding gain on equity securities. These increases were offset by a decrease of $193 thousand in gain on sale of securities. The increase in noninterest expense was primarily the result of an increase of $1.3 million in salaries and employee benefits expense, an increase of $269 thousand in other operating expenses, an increase of $115 thousand in professional fees, an increase of $88 thousand in occupancy and equipment expense, an increase of $47 thousand in travel, entertainment, dues, and subscriptions, and an increase of $46 thousand in data processing and communications.

Note 12 – 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 September 30, 2019 and 2018 is as follows:
(Dollars in thousands)Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018Three Months Ended September 30, 2019Three Months Ended September 30, 2018
Service cost$—  $—  $—  $—  
Interest cost294  264  98  88  
Expected Return on Plan Assets(306) (279) (102) (93) 
Amortization of Net Actuarial Loss204  230  68  77  
Amortization of Prior Service Cost—  —  —  —  
     Net Periodic Benefit Cost$192  $215  $64  $72  
Contributions Paid$270  $337  $90  $179  

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 monthly 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 $681 thousand and $377 thousand as of September 30, 2019 and December 31, 2018, respectively. Service cost was $102 thousand and $94 thousand for the three-month periods ended September 30, 2019 and 2018, respectively. Service cost was $305 thousand and $282 thousand for the nine-month periods ended September 30, 2019 and 2018, respectively.


Note 13 – Comprehensive Income

The following tables present the components of accumulated other comprehensive income (“AOCI”) nine months ended September 30, 2019 and 2018:
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(Dollars in thousands)Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018Three Months Ended September 30, 2019Three Months Ended September 30, 2018 
Details about AOCI ComponentsAmount Reclassified from AOCIAmount Reclassified from AOCIAmount Reclassified from AOCIAmount Reclassified from AOCIAffected line item in the Statement where Net Income is presented
Available-for-sale securities   
     Unrealized holding gains (losses)$(179) $327  $(11) $1  Gain (loss) on sale of securities
 (179) 327  (11) 1  Total before tax
 48  (88) 2  —  Income tax expense
 (131) 239  (9) 1  Net of tax
Defined benefit pension plan items   
     Amortization of net actuarial loss(204) (230) (68) (77) Salaries and benefits
 (204) (230) (68) (77) Total before tax
 55  62  18  21  Income tax expense
 (149) (168) (50) (56) Net of tax
Investment hedge
Carrying value adjustment162  —  36  —  Interest on investment securities - taxable
162  —  36  —  Total before tax
(44) —  (10) —  Income tax expense
118  —  26  —  Net of tax
Total reclassifications$(162) $71  $(33) $(55)  

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(Dollars in thousands)Unrealized gains (losses) on available for-sale securitiesDefined benefit pension plan itemsInvestment HedgeTotal
Balance at December 31, 2018$(3,384) $(3,422) $—  $(6,806) 
     Other comprehensive income (loss) before reclassification5,776  (1,274) —  4,502  
     Amounts reclassified from AOCI131  149  (118) 162  
Net current period OCI5,907  (1,125) (118) 4,664  
Balance at September 30, 2019$2,523  $(4,547) $(118) $(2,142) 
Balance at July 1, 2019$1,520  $(3,942) $(92) $(2,514) 
     Other comprehensive income (loss) before reclassification994  (655) —  339  
     Amounts reclassified from AOCI9  50  (26) 33  
Net current period OCI1,003  (605) (26) 372  
Balance at September 30, 2019$2,523  $(4,547) $(118) $(2,142) 
Balance at December 31, 2017(5) (2,983) —  (2,988) 
     Other comprehensive income (loss) before reclassification(5,443) 542  —  (4,901) 
     Amounts reclassified from AOCI(239) 168  —  (71) 
Net current period OCI(5,682) 710  —  (4,972) 
Stranded AOCI—  (646) —  (646) 
Mark to Market on equity positions held at December 31, 2017(98) —  —  (98) 
Balance at September 30, 2018$(5,785) $(2,919) $—  $(8,704) 
Balance at July 1, 2018(4,236) (3,065) —  (7,301) 
     Other comprehensive income (loss) before reclassification(1,548) 90  —  (1,458) 
     Amounts reclassified from AOCI(1) 56  —  55  
Net current period OCI(1,549) 146  —  (1,403) 
Balance at September 30, 2018$(5,785) $(2,919) $—  $(8,704) 

Note 14 – Revenue Recognition

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 there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained
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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.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Debit Card and Interchange Income

Debit card and interchange income is primarily comprised of interchange fees earned whenever the Bank’s debit and credit cards are processed through card payment networks, such as Visa. The Bank’s performance obligation for debit card and interchange income is generally satisfied, and the related revenue recognized, on a transactional basis. Payment is typically received immediately or in the following month.

Consulting Income

Consulting income is comprised of consulting revenue generated by Chartwell. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell accounts for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Chartwell evaluates the services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Chartwell's services included in its contracts are distinct from one another. Chartwell determines the transaction price for each contract based upon the consideration it expects to receive for the distinct services being provided under the contract. Chartwell recognizes revenue as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, Chartwell considers factors such as contract terms, payment terms, an whether there is an alternative future use of the product or service. Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans, financial models, and other risk management services to customers within financial industries. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement. For more information on Chartwell, please see Note 16, “Business Combination” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Other Operating Income

Other operating income is primarily comprised of ATM fees, wire transfer fees, travelers check fees, revenue streams such as safe deposit box rental fees, and other miscellaneous service charges. ATM fees, wire transfer fees and travelers check fees are primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Bank’s performance obligations for fees and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. The Bank’s performance obligation for the gains and losses on sales of other real estate owned is satisfied, and the related revenue recognized, after each sale of other real estate owned is closed.

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The following presents noninterest income, segregated by revenue streams in scope and out of scope of Topic 606, for the periods indicated:
(Dollars in thousands)Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018Three Months Ended September 30, 2019Three Months Ended September 30, 2018
Service charges on deposit accounts$985  $741  $337  $275  
Debit card and interchange income472  459  150  167  
Consulting income25  —  25  —  
Other379  144  108  87  
Noninterest income in scope of Topic 6062,264  1,489  753  617  
Noninterest income out of scope of Topic 60647,584  28,856  13,943  9,894  
Total noninterest income$49,848  $30,345  $14,696  $10,511  

Note 15 – Discontinued Operations

On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI Insurance Services, in which USI purchased substantially all of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million. MVB Insurance retained the assets related to, and continues to operate, its title insurance business. The title insurance business is immaterial in terms of revenue. The Company reorganized MVB Insurance as a subsidiary of the Bank. The Company retained approximately $424 thousand in liabilities and received proceeds totaling $7.0 million related to this transaction.

Based on a measurement period that ended June 30, 2019, the Company has earned and is reasonably assured to receive an earn-out payment related to the Asset Purchase Agreement with USI. As of June 30, 2019, the Company estimated the earn-out payment to be $600 thousand. This estimate was recorded as contingent consideration from discontinued operations. On August 27, 2019, the Company adjusted the estimate recorded in the second quarter of 2019 to match the earn-out payment received of $575 thousand.

There were no assets or liabilities related to discontinued operations at September 30, 2019 or December 31, 2018.

Net income from discontinued operations, net of tax, for the three and nine months ended September 30, 2019 and 2018, were as follows:
Nine Months Ended September 30Three Months Ended September 30
(Dollars in thousands)2019201820192018
NONINTEREST INCOME
Other operating income$575  $—  $(25) $—  
Total noninterest income575—  (25) —  
Income from discontinued operations, before income taxes$575  $—  $(25) $—  
Income tax expense - discontinued operations148  —  (6) —  
Net income from discontinued operations$427  $—  $(19) $—  
Note 16 – Business Combination

On September 13, 2019 the Bank purchased full equity rights of Chartwell Compliance headquartered in Bethesda, Maryland. Purchase consideration for the acquisition totaled $4.1 million, including a cash payment of $3.1 million and the delivery $1.0 million of MVB common stock. Additionally, contingent consideration will be given to the previous owners if outlined future financial conditions of the company are met. Management estimated the fair value of the earnout utilizing the Black-Scholes option pricing model.

Chartwell Compliance provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. As a stand-alone subsidiary of MVB Bank, Inc., Chartwell Compliance will expand its services to both Fintech and bank clients. Chartwell will coordinate with MVB Bank’s current compliance officers and be charged to help create and implement strategy and provide expert compliance resources to aid MVB in carrying out stringent and faster new client due diligence. Chartwell also will conduct enhanced monitoring and testing of clients.

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The Company has accounted for the purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date. The acquired assets and assumed liabilities of Chartwell Compliance were measured at estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition of Chartwell Compliance.

The following table provides the purchase price as of the acquisition date, the identifiable assets acquired and liabilities assumed at their estimated fair values, and the resulting goodwill of $1.2 million recorded from the acquisition.
(Dollars in thousands)As of September 13, 2019  
Purchase Price Consideration:
Cash consideration$3,077  
Closing MVB shares1,033  
Total purchase consideration$4,110  
Assets acquired at fair value:
Cash and cash equivalents$426  
Accounts receivable165  
Furniture and equipment, net4  
Intangibles, net3,220  
Total fair value of assets acquired$3,815  
Liabilities assumed at fair value:
Other liabilities$855  
Total fair value of liabilities acquired$855  
Net assets acquired at fair value:$2,960  
Amount of goodwill resulting from acquisition$1,150  






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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 September 30, 2019 and December 31, 2018 and the results of our operations for the three and nine months ended September 30, 2019 and 2018. 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, 2018.

Forward-Looking Statements:

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

•statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of 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 our view 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:

•our ability 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, 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 we 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;
•our ability to successfully conduct acquisitions and integrate acquired businesses;
•potential difficulties in expanding our businesses 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 our ability 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 we engage in such activities, the fees that our 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 us, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;
•success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
•changes in consumer spending and savings habits;
•increased competitive challenges and expanding product and pricing pressures among financial institutions;
•inflation and deflation;
•technological changes and our implementation of new technologies;
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•our ability to develop and maintain secure and reliable information technology systems;
•legislation or regulatory changes which adversely affect our operations or business;
•our ability 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, 2018.

Except to the extent required by law, we specifically disclaim 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.
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Summary of Results of Operations

Nine Months Ended September 30Three Months Ended September 30
(Dollars in thousands, except per share data)2019201820192018
Earnings and Per Share Data:
     Net income from continuing operations$22,469  $9,004  $4,346  $3,579  
     Net income from discontinued operations427  —  (19) —  
     Net income22,896  9,004  4,327  3,579  
     Net income available to common shareholders22,532  8,638  4,206  3,456  
     Earnings per share from continuing operations - basic1.89  0.80  0.36  0.30  
     Earnings per share from discontinued operations - basic0.04  —  —  —  
     Earnings per share - basic1.93  0.80  0.36  0.30  
     Earnings per share from continuing operations - diluted1.84  0.77  0.35  0.29  
     Earnings per share from discontinued operations - diluted0.04  —  —  —  
     Earnings per share - diluted1.88  0.77  0.35  0.29  
     Cash dividends paid per common share0.125  0.08  0.05  0.03  
     Book value per common share16.84  14.13  16.84  14.13  
     Weighted average shares outstanding - basic11,661,581  10,845,166  11,731,774  11,416,202  
     Weighted average shares outstanding - diluted11,957,385  11,690,314  12,098,335  13,113,259  
Performance Ratios:
     Return on average assets - continuing operations 1
1.64 %0.75 %0.92 %0.85 %
     Return on average assets - discontinued operations 1
0.03 %— %— %— %
     Return on average assets 1
1.67 %0.75 %0.92 %0.85 %
     Return on average equity - continuing operations 1
15.69 %7.65 %8.54 %8.53 %
     Return on average equity - discontinued operations 1
0.30 %— %(0.04)%— %
     Return on average equity 1
15.99 %7.65 %8.50 %8.53 %
     Net interest margin 2
3.45 %3.37 %3.42 %3.43 %
     Efficiency ratio 3
66.63 %80.02 %78.64 %76.63 %
     Overhead ratio 1 4
4.55 %4.52 %4.96 %4.38 %
Asset Quality Data and Ratios:
     Charge-offs$676  $679  $—  $294  
     Recoveries$54  $92  $49  $13  
     Net loan charge-offs to total loans 1 5
0.06 %0.06 %(0.01)%0.09 %
     Allowance for loan losses$11,874  $11,439  $11,874  $11,439  
     Allowance for loan losses to total loans 6
0.86 %0.88 %0.86 %0.88 %
     Nonperforming loans$5,627  $12,846  $5,627  $12,846  
     Nonperforming loans to total loans0.41 %0.99 %0.41 %0.99 %
Capital Ratios:
     Equity to assets10.51 %9.92 %10.51 %9.92 %
     Bank Leverage ratio9.88 %10.31 %9.88 %10.31 %
     Bank Common equity Tier 1 capital ratio11.83 %12.68 %11.83 %12.68 %
     Bank Tier 1 risk-based capital ratio11.83 %12.68 %11.83 %12.68 %
     Bank Total risk-based capital ratio12.62 %13.56 %12.62 %13.56 %
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
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Introduction

Corporate Overview

MVB Financial Corp. is a financial holding company and was organized in 2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, MVB CDC, and Chartwell.

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 CDC was formed in 2017 and was created as a means to provide opportunities for loans and investments that help to increase access to equity capital in under-served urban and rural areas of West Virginia and our market areas in Virginia. MVB CDC promotes specific bank-driven economic development strategies, provides for effective support for its CRA compliance strategy, and helps to support positive local reputation of the Bank through marketing and visible activities in the communities where we live and work.

Chartwell Compliance, based from Bethesda, Maryland, was acquired by MVB on September 13, 2019. Chartwell Compliance provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell will expand its services to both Fintech clients and banks, coordinating with MVB Bank’s current compliance officers and helping create and implement strategy and provide expert compliance resources to aid MVB in carrying out stringent and faster new client due diligence.

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 and credit cards;
•Cashier’s checks and money orders;
•Safe deposit rental facilities; and
•Non-deposit investment services.

The Company is also involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech. The dedicated Fintech sales team is based in Salt Lake City, UT and specializes in providing banking services to corporate Fintech clients, with an overarching focus on operational risk and compliance. This business line has the potential for fee income revenue as partnerships grow.

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. The Bank has deployed Automated Interactive Teller machines (“AITs”) in several branch locations. AITs provide services by featuring video interaction with a bank employee upon request. A customer can deposit cash and checks and withdraw cash, as well as a variety of other services typically occurring in a traditional branch location.

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, North Carolina, and South Carolina and added enough volume to further diversify the Company’s revenue stream.

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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 2018 filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.

At September 30, 2019, the Company had 420 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 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 2018 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 2018 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 September 30, 2019, the Company earned $4.3 million compared to $3.6 million in the third quarter of 2018, excluding discontinued operations. Net interest income increased by $1.5 million, noninterest income increased by $4.2 million, and noninterest expenses increased by $5.0 million. The increase in net interest income was driven by an increase of $2.9 million in interest income. The increase in interest income was partially offset by an increase of $1.4 million in interest expense. The increase in interest income was due to average loan growth of $170.4 million with the yield on loans and loans held for sale increasing by 19 basis points, primarily due to an increase in commercial loan yield of 29 basis points. The $61.9 million increase in average interest-bearing liabilities generated the increase in interest expense of $1.4 million. The increase in interest expense
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was mainly driven by a $715 thousand increase in interest expense on money market checking, as a result of increasing rates on money market checking, and a $450 thousand increase in interest expense on certificates of deposit, through short-term brokered certificates of deposit, and an increase in the rates of certificates of deposit. Money market checking increased by $87.2 million while the cost of funds on money market checking increased by 56 basis point compared to the third quarter of 2018. Certificates of deposit increased by $18.3 million while the cost of funds on certificates of deposit increased by 40 basis points compared to the three months ended September 30, 2018. The increase in noninterest income was primarily the result of an increase in mortgage fee income of $2.5 million due to increased mortgage productivity. The increase in noninterest expense was mainly driven by the increases in salaries and benefits of $3.9 million, largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team.

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 $657 thousand and $1.1 million were made for the three months ended September 30, 2019 and 2018, respectively. The significant decrease in loan loss provision is the result of the net impact of changes in outstanding loan portfolios, changes in the level of recognized charge offs, changes in historical loss rates, and changes in the level of specific loan loss allocations. Most notably, the commercial historical loss rates decreased in the third quarter of 2019 versus the same time period in 2018, which resulted in a need for relatively less provision per dollar of new loan growth in the third quarter of 2019 versus the third quarter of 2018. Meanwhile, provision was impacted by a $981 thousand increase in the specific loan loss allocations in the third quarter of 2019, relative to a $526 thousand increase in the third quarter of 2018. Loan volume deceased in the third quarter of 2019 versus the same time period in 2018. The residential mortgage loan portfolio increased by $17 million in the second quarter of 2019, while increasing by $38 million in the second quarter of 2018. Additionally, the commercial loan portfolio increased by $39 million for the three months ended September 30, 2019, in comparison to $45 million for the three months ended September 30, 2018. Meanwhile, there were no charge offs in the third quarter of 2019, while there were $295 thousand in the third quarter of 2018.

For the nine months ended September 30, 2019, the Company earned $22.5 million compared to $9.0 million for the nine months ended September 30, 2018, excluding discontinued operations. Net interest income increased by $5.9 million, noninterest income increased by $19.5 million, and noninterest expenses increased by $7.8 million. The increase in net interest income was driven by an increase of $11.0 million in interest income, which was partially offset by an increase of $5.1 million in interest expense. The increase in interest income was due to average loan growth of $191.9 million, with the yield on loans and loans held for sale increasing by 34 basis points, primarily due to an increase in commercial loan yield of 47 basis points and a 104-basis point increase in consumer loan yield. The $72.1 million increase in average interest-bearing liabilities generated the increase in interest expense of $5.1 million. The increase in interest expense was driven by a $2.9 million increase in interest expense on certificates of deposit, through short-term brokered certificates of deposit, and an increase in the rates of certificates of deposit, as well as a $2.1 million increase in interest expense on money market checking and an increase in the rates on money market checking. Average certificates of deposit increased by $105.4 million, while the cost of funds on certificates of deposit increased by 53 basis points since September 30, 2018. Average money market checking increased by $80.6 million, while the cost of funds on money market checking increased by 66 basis points compared to the nine months ended September 30, 2018. The increase in noninterest income was primarily the result of an increase in holding gain on equity securities of $13.2 million relating to a Fintech investment. The increase in noninterest expense is mainly due to an increase in salaries and benefits of $6.0 million, largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team.

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 $1.6 million and $2.1 million were made for the nine months ended September 30, 2019 and 2018, respectively. The significant decrease in loan loss provision is the result of the net impact of changes in outstanding loan portfolios, changes in the level of recognized charge offs, changes in historical loss rates, and changes in the level of specific loan loss allocations. The decrease in loan loss provision is most attributable to decreased loan volume in the nine months ended September 30, 2019 versus the same time period in 2018. Most notably, the commercial loan portfolio increased by $83 million in the nine months ended September 30, 2019, in comparison to an increase of $145 million for the nine months ended September 30, 2018. Likewise, the residential mortgage loan portfolio decreased by $4 million in 2019, versus an increase of $53 million in 2018. Meanwhile, slightly reduced historical loan loss rates resulted in a need for relatively less provision per dollar of new loan growth in nine months ended September 30, 2019 versus the same time period in 2018. The reduction in historical loss rates is primarily the result of the rolling quarter loss rate calculation, which no longer includes certain historical quarters which reported some of the Bank’s most significant commercial loan losses. The historical loan loss rates have also decreased in the nine months ended September 30, 2019 as a result of the increased reliance upon the Bank’s actual loss rates for its Northern Virginia commercial loan portfolio, rather than relying more heavily on peer loss rates in the historical loan loss rate calculations. Peer loss rates had been used exclusively until such time as the Northern Virginia commercial loan portfolio had accumulated at least twelve quarters of loss history. Since that time, the calculation is gradually weighted more heavily towards the Company’s actual loss rates. Specific loan loss allocations increased by $472 thousand in the nine months ended September
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30, 2019, in comparison to an increase of $388 thousand in the nine months ended September 30, 2018. Lastly, the charge offs totaled $676 thousand in loans during the nine months ended September 30, 2019 versus $679 thousand for the same time period in 2018.

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 the current rate environment and competitive pricing of loans and deposits in the Bank’s markets.

For the three months ended September 30, 2019 versus 2018, the Company was able to grow average loans and loans held for sale balances by $170.4 million to $1.5 billion. Average investment securities increased $3.5 million to $232.0 million. Average interest-bearing liabilities increased by $61.9 million, primarily the result of a $87.2 million increase in average money market checking and a $18.3 million increase in average certificates of deposit balances, offset by a $28.1 million decrease in average NOW and a $10.4 million decrease in average subordinated debt. An increase in the Company’s average non-interest balances of $78.2 million helped to grow a 37-basis point favorable spread on net interest margin in 2019 compared to a 23-basis point spread in 2018.

The net interest margin for the three months ended September 30, 2019 and 2018 was 3.42% and 3.43%, respectively. The 1-basis point decrease in the net interest margin for the three months ended September 30, 2019 was the result of a 18-basis point increase in yield on average earning assets, primarily the result of a 19-basis point increase in yield on loans and loans held for sale, offset by a 7-basis point decrease in yield on investment securities. More specifically, the increase in yield on loans and loans held for sale was driven by an increase in commercial loan yield of 29 basis points and a 203-basis point increase in yield on consumer loans. Cost of interest-bearing liabilities for the three months ended September 30, 2019 versus 2018 increased by 33 basis points. The cost of interest-bearing liabilities increase was mainly the result of a 24-basis point increase in FHLB and other borrowings and a 40-basis point increase in interest-bearing deposits. More specifically, the increase in interest-bearing deposits was as follows: a 56-basis point increase in money market checking, a 40-basis point increase in certificates of deposit, a 26-basis point increase in IRAs, and an 23-basis point increase in NOW, with a 0-basis point change in cost of funds in savings.

For the nine months ended September 30, 2019 versus 2018, the Company was able to grow average loans and loans held for sale balances by $191.9 million to $1.4 billion. Average investment securities decreased $2.1 million to $228.2 million. Average interest-bearing liabilities increased by $72.1 million, primarily the result of a $105.4 million increase in average certificates of deposit balances and a $80.6 million increase in average money market checking, offset by a $70.1 million decrease in average NOW and a $16.1 million decrease in average FHLB and other borrowing balances. An increase in the Company’s average non-interest balances of $89.5 million helped to grow a 35-basis point favorable spread on net interest margin in 2019 compared to a 19-basis point in 2018.

The net interest margin for the nine months ended September 30, 2019 and 2018 was 3.45% and 3.37%, respectively. The 8-basis point increase in the net interest margin for the nine months ended September 30, 2019 was the result of a 35-basis point increase in yield on average earning assets, primarily the result of a 34-basis point increase in yield on loans and loans held for sale and a 15-basis point increase in yield on investment securities. More specifically, the increase in yield on loans and loans held for sale was driven by an increase in commercial loan yield of 47 basis points and a 104-basis point increase in yield on consumer loans. Cost of interest-bearing liabilities for the nine months ended September 30, 2019 versus 2018 increased by 43 basis points. The cost of interest-bearing liabilities increase was mainly the result of a 64-basis point increase in FHLB and other borrowings and a 51-basis point increase in interest-bearing deposits. More specifically, the increase in interest-bearing deposits was as follows: a 66-basis point increase in money market checking, a 53-basis point increase in certificates of deposit, a 35-basis point increase in IRAs, and a 18-basis point increase in NOW, which was offset by an 7-basis point decrease in savings.

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.
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MVB Financial Corp. and Subsidiaries
Average Balances and Interest Rates
(Unaudited) (Dollars in thousands)
Three Months Ended September 30, 2019Three Months Ended September 30, 2018
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$9,562  $61  2.53 %$5,178  $30  2.30 %
CDs with other banks14,143  71  1.99  14,778  73  1.96  
Investment securities:
     Taxable122,648  689  2.23  148,499  869  2.32  
     Tax-exempt109,324  879  3.19  79,961  715  3.55  
Loans and loans held for sale: 1
     Commercial1,002,595  13,599  5.38  883,051  11,323  5.09  
     Tax exempt11,229  100  3.53  14,231  125  3.48  
     Real estate464,769  5,490  4.69  408,719  4,909  4.77  
     Consumer8,612  149  6.86  10,844  132  4.83  
Total loans1,487,205  19,338  5.16  1,316,845  16,489  4.97  
Total earning assets1,742,882  21,038  4.79  1,565,261  18,176  4.61  
Less: Allowance for loan losses(11,232) (10,717) 
Cash and due from banks18,366  18,020  
Other assets134,871  108,618  
     Total assets$1,884,887  $1,681,182  
Liabilities
Deposits:
     NOW$384,977  $942  0.97 %$413,121  $773  0.74 %
     Money market checking333,849  1,391  1.65  246,624  676  1.09  
     Savings37,335  1  0.01  42,760  1  0.01  
     IRAs17,342  84  1.92  17,950  75  1.66  
     CDs366,749  2,035  2.20  348,467  1,585  1.80  
Repurchase agreements and federal funds sold9,493  12  0.50  17,911  10  0.22  
FHLB and other borrowings212,102  1,383  2.59  202,670  1,199  2.35  
Subordinated debt9,535  156  6.49  19,932  333  6.63  
     Total interest-bearing liabilities1,371,382  6,004  1.74  1,309,435  4,652  1.41  
Noninterest bearing demand deposits271,294  193,116  
Other liabilities38,618  10,710  
     Total liabilities1,681,294  1,513,261  
Stockholders’ equity
Preferred stock7,644  7,834  
Common stock11,773  11,467  
Paid-in capital119,166  113,482  
Treasury stock(1,084) (1,084) 
Retained earnings67,312  43,793  
Accumulated other comprehensive (loss)(1,218) (7,571) 
     Total stockholders’ equity203,593  167,921  
     Total liabilities and stockholders’ equity$1,884,887  $1,681,182  
Net interest spread3.05  3.20  
Net interest income-margin$15,034  3.42 %$13,524  3.43 %
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.

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MVB Financial Corp. and Subsidiaries
Average Balances and Interest Rates
(Unaudited) (Dollars in thousands)
Nine Months Ended September 30, 2019Nine Months Ended September 30, 2018
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$8,904  $163  2.45 %$4,183  $64  2.05 %
CDs with other banks14,498  216  1.99  14,778  220  1.99  
Investment securities:
     Taxable127,631  2,336  2.45  151,362  2,655  2.35  
     Tax-exempt100,530  2,610  3.47  78,910  2,087  3.54  
Loans and loans held for sale: 1
     Commercial973,547  39,258  5.39  830,371  30,582  4.92  
     Tax exempt12,831  337  3.51  14,318  371  3.46  
     Real estate441,238  15,794  4.79  388,494  13,755  4.73  
     Consumer9,217  417  6.05  11,731  440  5.01  
Total loans1,436,833  55,806  5.19  1,244,914  45,148  4.85  
Total earning assets1,688,396  61,131  4.84  1,494,147  50,174  4.49  
Less: Allowance for loan losses(11,174) (10,281) 
Cash and due from banks16,820  16,933  
Other assets129,594  105,743  
     Total assets$1,823,636  $1,606,542  
Liabilities
Deposits:
     NOW$368,709  $2,510  0.91 %$438,784  $2,382  0.73 %
     Money market checking319,919  3,721  1.56  239,305  1,604  0.90  
     Savings39,066  3  0.01  45,247  27  0.08  
     IRAs17,627  250  1.90  17,880  207  1.55  
     CDs403,294  6,640  2.20  297,876  3,718  1.67  
Repurchase agreements and federal funds sold11,764  37  0.42  19,535  49  0.34  
FHLB and other borrowings180,552  3,707  2.75  196,610  3,110  2.11  
Subordinated debt14,821  728  6.57  28,441  1,433  6.74  
     Total interest-bearing liabilities1,355,752  17,596  1.74  1,283,678  12,530  1.31  
Noninterest bearing demand deposits245,705  156,165  
Other liabilities31,305  9,764  
     Total liabilities1,632,762  1,449,607  
Stockholders’ equity
Preferred stock7,770  7,834  
Common stock11,709  10,896  
Paid-in capital117,923  104,776  
Treasury stock(1,084) (1,084) 
Retained earnings58,726  41,046  
Accumulated other comprehensive (loss)(4,170) (6,533) 
     Total stockholders’ equity190,874  156,935  
     Total liabilities and stockholders’ equity$1,823,636  $1,606,542  
Net interest spread3.10  3.18  
Net interest income-margin$43,535  3.45 % $37,644  3.37 %
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.

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Noninterest Income

Mortgage fee income, gain (loss) on derivatives, interchange income, commercial swap fee income, insurance and investment services income, 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 September 30, 2019, noninterest income totaled $14.7 million compared to $10.5 million for the same time period in 2018. The $4.2 million increase in noninterest income was primarily the result of an increase in mortgage fee income of $2.5 million, an increase in gain on derivatives of $1.8 million, an increase in commercial swap fee income of $622 thousand, an increase in other operating income of $100 thousand, an increase in service charges on deposits of $62 thousand, and an increase on gain on sale of portfolio loans of $45 thousand. These increases were partially offset by a decrease in the holding gain on equity securities of $623 thousand and a decrease in income on bank owned life insurance of $296 thousand. The increase in mortgage fee income of $2.5 million is driven by an increase of $122.9 million in mortgage loans sold for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase in gain on derivatives of $1.8 million was largely the result of a decrease of 1.06% in the locked pipeline of residential mortgage loans during the three months ended September 30, 2019 compared to a decrease of 19.62% in the locked pipeline of residential mortgage loans during the three months ended September 30, 2018. The increase in commercial swap fee income of $622 thousand is due to swap volume of $29.8 million for the third quarter of 2019 compared to $400 thousand for the third quarter of 2018.The increase of $100 thousand in other operating income was primarily due to an increase of $21 thousand in dividends from bank stock, an increase of $15 thousand in wire transfer fees, and an increase of $13 thousand in dividends on FHLB stock.

For the nine months ended September 30, 2019, noninterest income totaled $49.8 million compared to $30.3 million for the same time period in 2018. The $19.5 million increase in noninterest income was primarily the result of an increase in holding gain on equity securities of $13.2 million, an increase in mortgage fee income of $3.4 million, an increase in gain on derivatives of $2.2 million, an increase in commercial swap fee income of $727 thousand, an increase in other operating income of $284 thousand, and an increase in service charges on deposits of $244 thousand. These increases were partially offset by a decrease in the gain on sale of available-for-sale securities of $506 thousand. The increase in the holding gain on equity securities was the result of a recent valuation of the Company’s fintech investment portfolio. The increase in mortgage fee income of $3.4 million is due to the increase of $161.3 million in mortgage loans sold volume for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in gain on derivatives of $2.2 million was largely the result of an increase of 94.10% in the locked pipeline of residential mortgage loans during the nine months ended September 30, 2019 compared to an increase of 34.04% in the locked pipeline of residential mortgage loans during the nine months ended September 30, 2018. The increase in commercial swap fee income of $727 thousand is due to swap volume of $39.1 million for the nine months ended September 30, 2019 compared to $29.4 million for the nine months ended September 30, 2018. The increase of $284 thousand in other operating income was primarily due to an increase of $165 thousand in dividends on FHLB stock and an increase of $50 thousand in wire transfer fees.
Noninterest Expense

The Company had 420 full-time equivalent personnel at September 30, 2019, as noted, compared to 395 full-time equivalent personnel as of September 30, 2018. 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, travel and entertainment, dues and subscriptions, data processing and communications, mortgage processing and professional fees generate the core of the Company’s noninterest expense. The Company’s efficiency ratio was 78.64% for the third quarter of 2019 compared to 76.63% for the third quarter of 2018. The Company’s efficiency ratio was 66.63% for the nine months ended September 30, 2019 compared to 80.02% for the same time period in 2018. This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus noninterest income. The decreased efficiency ratio for the nine months ended September 30, 2019 is the result of net interest income and noninterest income outpacing the growth in noninterest expense and was particularly affected by the holding gain on equity securities.

For the three months ended September 30, 2019, noninterest expense totaled $23.4 million compared to $18.4 million for the same time period in 2018. The $5.0 million increase in noninterest expense was primarily the result of the following:

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Salaries and employee benefits expense increased by $3.9 million. The increase was largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team.

Travel, entertainment, dues, and subscriptions expense increased by $413 thousand. This increase was mainly driven by travel for deposit acquisition and on-boarding costs, including due diligence, related to Fintech opportunities.

Professional fees expense increased by $301 thousand. This increase was largely due to an increase in Fintech-related consulting fees and due to Chartwell related acquisition costs.

Marketing, contributions and sponsorships increased by $166 thousand. This increase was mainly due to increased marketing efforts related to the promotion of new fintech projects.

Occupancy and equipment expense increased by $151 thousand. This increase was primarily driven by the branch expansion and additional personnel related to overall corporate expansion.

Data processing and communications increased by $130 thousand. The increase was primarily driven by data processing projects focusing on improving internal systems.

Mortgage processing expense decreased by $139 thousand. This decrease was driven by a $136 thousand decrease in LSP, LLC services due to increased efficiencies. Following an increase in ownership in late 2017, management has focused on reducing operating costs and overhead expenses.

For the nine months ended September 30, 2019, noninterest expense totaled $62.2 million compared to $54.4 million for the same time period in 2018. The $7.8 million increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased by $6.0 million. The increase was largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team.

Travel, entertainment, dues, and subscriptions expense increased by $728 thousand. This increase was mainly driven by travel for deposit acquisition and on-boarding costs, including due diligence, related to Fintech opportunities

Occupancy and equipment expense increased by $526 thousand. This increase was primarily driven by the branch expansion and additional personnel related to overall corporate expansion.

Professional fees expense increased by $477 thousand. This increase was largely due to an increase in Fintech-related consulting fees and due to Chartwell related acquisition costs.

Data processing and communication expense increased by $290 thousand. The increase was primarily driven by data processing projects focusing on improving internal systems.

Mortgage processing expense decreased by $498 thousand. This decrease was driven by a $534 thousand decrease in LSP, LLC services due to increased efficiencies. Following an increase in ownership in late 2017, management has focused on reducing operating costs and overhead expenses.

Return on Average Assets (Annualized)

Excluding discontinued operations, the Company’s return on average assets was 0.92% for the third quarter of 2019, compared to 0.85% for the third quarter of 2018. The increased return for the third quarter of 2019 is a direct result of a $767 thousand increase in earnings, while average total assets increased by $203.7 million, primarily the result of a $170.4 million increase in average total loans and loans held for sale and a $26.3 million increase in average other assets. The increase in other assets is primarily driven by the right-of-use assets totaling $12.9 million related to the implementation of ASU 2016-02, Leases (Topic 842).

Excluding discontinued operations, the Company’s return on average assets was 1.64% for the nine months ended September 30, 2019, compared to 0.75% for the nine months ended September 30, 2018. The increased return for the nine months ended September 30, 2019 is a direct result of a $13.5 million increase in earnings, mainly driven by the $13.8 million in holding gain on equity securities, while average total assets increased by $217.1 million, primarily the result of a $191.9 million increase in average total loans and loans held for sale and a $23.9 million increase in average other assets. The increase in other assets is
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primarily driven by the right-of-use assets totaling $12.9 million related to the implementation of ASU 2016-02, Leases (Topic 842).

Return on Average Equity (Annualized)

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 8.54% for the third quarter of 2019, compared to 8.53% for the third quarter of 2018. The increased return for the third quarter of 2019 is a direct result of a $767 thousand increase in earnings, while average stockholders’ equity increased by $35.7 million. The increase in average stockholders’ equity was primarily due to a $5.7 million increase in paid-in capital, primarily due to the subordinated debt conversions, and a $23.5 million increase in retained earnings.

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 15.69% for the nine months ended September 30, 2019, compared to 7.65% for the nine months ended September 30, 2018. The increased return for the nine months ended September 30, 2019 is a direct result of a $13.5 million increase in earnings, mainly driven by the $13.8 million in holding gain on equity securities, while average stockholders’ equity increased by $33.9 million. The increase in average stockholders’ equity was primarily due to an $13.1 million increase in paid-in capital, primarily due to the subordinated debt conversions, and a $17.7 million increase in retained earnings.

Overview of the Consolidated Balance Sheets

The greatest balance changes since December 31, 2018 were as follows: total assets increased by $211.0 million, to $2.0 billion, loans increased $78.0 million, to $1.4 billion, investment securities increased $4.5 million, to $226.1 million, deposits increased $147.3 million, to $1.5 billion, borrowings increased $26.8 million, to $241.6 million, and stockholders’ equity increased by $29.5 million, to $206.2 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $36.6 million at September 30, 2019, compared to $22.2 million at December 31, 2018.

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 $244.5 million at September 30, 2019, compared to $231.2 million at December 31, 2018. As of September 30, 2019, the investment portfolio is comprised of the following mix of securities:

•45.8% – Municipal securities
•21.8% – U.S. Agency securities
•20.5% – U.S. Sponsored Mortgage-backed securities
•4.4% – Other securities
•7.5% – Equity 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 $1.4 billion as of September 30, 2019 and totaled $1.3 billion as of December 31, 2018. 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
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market is in the adjacent counties. The portfolio consists principally of commercial lending, mortgage 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 September 30, 2019 and December 31, 2018, $1.0 billion, or 74.1% and $941.0 million, or 72.1%, 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 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 $11.9 million or 0.86% of total loans at September 30, 2019 compared to $10.9 million or 0.84% of total loans at December 31, 2018. The nominal increase in this ratio was the direct result of the net impact of changes in outstanding loan portfolios, changes in the level of recognized charges offs, changes in historical loss rates, and changes in the level of specific loan loss allocations since December 31, 2018. 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 $1.5 billion at September 30, 2019.

Noninterest-bearing deposits remain a core funding source for the Bank and thus, the Company. At September 30, 2019, noninterest-bearing balances totaled $275.0 million compared to $213.6 million at December 31, 2018. Of the $275.0 million, noninterest-bearing balances of $96.0 million are related to Fintech opportunities and noninterest-bearing balances of $34.7 million are related to title business funds. The Company and Bank management intend to continue to focus on finding ways to increase the base of noninterest-bearing sources.

Interest-bearing deposits totaled $1.2 billion at September 30, 2019 compared to $1.1 billion at December 31, 2018.

At September 30, 2019, the Bank had brokered deposits of $115.6 million and CDs with other banks of $36.6 million. At December 31, 2018, brokered deposits totaled $142.8 million and CDs with other banks totaled $9.6 million.

Average interest-bearing deposits totaled $1.1 billion during the third quarter of 2019 compared to $1.1 billion during the third quarter of 2018, an increase of $71.3 million. Average noninterest bearing deposits totaled $271.3 million during the third quarter of 2019 compared to $193.1 million during the third quarter of 2018, an increase of $78.2 million. Management will continue to emphasize deposit growth opportunities from the network of current customers and Fintech partners. 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 and other borrowings to fund its operations and investments. At September 30, 2019, repurchase agreements totaled $9.5 million compared to $14.9 million at December 31, 2018. In addition to the aforementioned funds alternatives, the Bank has access to more than $84.5 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.

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Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand, and deposit withdrawals, without incurring a sustained negative impact on net interest income. It is 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 nine months ended September 30, 2019, cash provided by financing activities totaled $154.7 million, while outflows from investing activity totaled $74.6 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 $75 million remains available, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion. 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 fifteen full-service banking branches: twelve in West Virginia and three in Virginia. MVB Mortgage operates eleven mortgage-only offices, located in Virginia, within the Washington, DC metropolitan area, Maryland, 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 3.3% and 3.6% in September 2019 and 2018, respectively. The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:
August 2019August 2018
Berkeley County, WV3.5 %4.1 %
Harrison County, WV4.0  4.3  
Jefferson County, WV3.2  3.4  
Marion County, WV4.9  5.5  
Monongalia County, WV3.7  4.3  
Kanawha County, WV4.4  5.0  
Fairfax County, VA2.3  2.6  
Loudoun County, VA2.3  2.6  

Capital/Stockholders' Equity

For the nine months ended September 30, 2019, stockholders’ equity increased approximately $29.5 million to $206.2 million. This increase consists of net income for the year-to-date of $22.9 million, a decrease in other comprehensive loss of $4.7 million, stock based compensation of $1.3 million, and common stock options exercised totaling $876 thousand, offset by dividends paid totaling $1.8 million. As stockholders’ equity increased, the equity to assets ratio increased 0.41% to 10.51%. The Company paid
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dividends to common shareholders of $1.5 million in the nine months ended September 30, 2019 and $873 thousand in the nine months ended September 30, 2018, and earned $22.9 million in the nine months ended September 30, 2019 versus $9.0 million in the nine months ended September 30, 2018, resulting in the dividend payout ratio decreasing from 10.11% in the nine months ended September 30, 2018 to 6.47% in the nine months ended September 30, 2019.

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 9, “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 September 30, 2019, accumulated other comprehensive loss totaled $2.1 million, a decrease in the loss of $4.7 million from December 31, 2018. Total securities available-for-sale in an unrealized loss position decreased by $4.1 million to $789 thousand at September 30, 2019. 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 approval if dividends declared in any year exceeds that years retained net profits, as defined, plus the retained net profits, as defined, of the two preceding years.

Capital Requirements

The Bank’s total risk-based capital ratio decreased from 13.29% at December 31, 2018 to 12.62% at September 30, 2019. The decrease in this ratio was largely due to an increase of risk-weighted assets of $151.4 million outpacing the increase in total capital of $9.8 million.

The Bank is required to comply with applicable capital adequacy standards established by the FDIC (“Capital Rules”). The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. 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 “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.

Since fully phased in on January 1, 2019, the Capital Rules require 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
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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.

In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the
regulatory burden for such smaller financial institutions. Because the amendments were proposed with a request for comments and have not been finalized, we do not yet know what effect the final rules will have on the Bank’s capital calculations. In November 2017, the federal banking agencies extended for community banks the existing capital requirements for certain items, including mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest, which were scheduled to change effective January 1, 2018, in light of the simplification amendments being considered.

In June 2016, the Financial Accounting Standards Board issued an update to the accounting standards for credit losses that included the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL becomes effective January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the implementation of CECL.

Notwithstanding the foregoing, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”), which was enacted on May 24, 2018, simplifies capital calculations by requiring regulators to establish for insured depository institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements under the Capital Rules. Such institutions that meet the community bank leverage ratio will automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. On September 17, 2019, the Board of the Federal Deposit Insurance Corporation passed a final rule on the community bank leverage ratio, setting the minimum required community bank leverage ratio at 9%. In addition, the Federal Reserve Board was required to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant non-banking activities. The rule will go into effect on January 1, 2020, and until such time, the Capital Rules as described above remain in effect.

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.”

Prompt Corrective Action

The Federal Deposit Insurance Act (“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
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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.

As noted above, the EGRRCPA will eliminate these requirements for banks with less than $10.0 billion in assets who elect to follow the community bank leverage ratio once the rule goes into effect on January 1, 2020.

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.

At September 30, 2019, the Company is considered to be well-capitalized.

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 included in Item 8, Financial Statements and Supplementary Data, of the Company’s December 31, 2018 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.

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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 September 30, 2019 and December 31, 2018. 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's 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.

Market Risk

There have been no material changes in market risks faced by the Company since December 31, 2018. For information regarding the Company’s market risk, refer to the Company’s December 31, 2018, 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.

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Future Outlook

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. The Company is expanding the treasury services function to support the banking needs of financial and emerging technology companies, which will further enhance core deposits.

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 June 30, 2019. 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 June 30, 2019, over a twelve-month period, an immediate 100-basis point increase in interest rates would result in an increase in net interest income by 3.2%. An immediate 200-basis point increase in interest rates would result in an increase in net interest income by 5.7%. A 100-basis point decrease in interest rates would result in a decrease in net interest income of 9.1%. 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 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.

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 September 30, 2019, 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 September 30, 2019.

There have been no material changes in the Company’s internal control over financial reporting during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2018. There have been no material changes in our risk factors from those disclosed.

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

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase

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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:October 28, 2019By:/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
Date:October 28, 2019By:/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)


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