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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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-20200331_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 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 April 27, 2020, the Registrant had 11,949,767 shares of common stock outstanding with a par value of $1.00 per share.
2

TABLE OF CONTENTS

Page

2

PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
March 31, 2020December 31, 2019
(Unaudited)(Note 1)
ASSETS
Cash and cash equivalents:
     Cash and due from banks$25,670  $18,430  
     Interest bearing balances with banks63,204  9,572  
     Total cash and cash equivalents88,874  28,002  
Certificates of deposit with other banks12,549  12,549  
Investment securities available-for-sale, at fair value223,101  235,821  
Equity securities19,026  18,514  
Loans held for sale186,128  109,788  
Loans:1,396,578  1,374,541  
     Less: Allowance for loan losses(11,161) (11,775) 
     Net Loans1,385,417  1,362,766  
Premises and equipment, net22,329  21,974  
Bank owned life insurance35,597  35,374  
Accrued interest receivable and other assets67,892  53,142  
Assets of branches held for sale (See Footnote 1)39,137  46,554  
Goodwill19,630  19,630  
TOTAL ASSETS$2,099,680  $1,944,114  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Deposits: 
     Noninterest bearing$387,536  $278,547  
     Interest bearing1,210,703  986,495  
     Total deposits1,598,239  1,265,042  
Deposits of branches held for sale (See Footnote 1)187,807  188,270  
Accrued interest payable and other liabilities58,196  41,685  
Repurchase agreements9,346  10,172  
FHLB and other borrowings30,815  222,885  
Subordinated debt4,124  4,124  
     Total liabilities1,888,527  1,732,178  
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1,000; 20,000 authorized; 733 issued in 2020 and 2019, respectively (See Footnote 7)7,334  7,334  
Common stock, par value $1; 20,000,000 shares authorized; 11,997,866 shares issued and 11,930,489 shares outstanding in 2019 and 11,995,366 shares issued and 11,944,289 shares outstanding in 201911,998  11,995  
Additional paid-in capital123,049  122,516  
Retained earnings72,354  72,496  
Accumulated other comprehensive loss(2,238) (1,321) 
Treasury stock, 67,377 shares in 2020 and 51,077 shares in 2019, at cost(1,344) (1,084) 
     Total stockholders’ equity211,153  211,936  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,099,680  $1,944,114  

See accompanying notes to unaudited consolidated financial statements.
3

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
Three Months Ended March 31
20202019
INTEREST INCOME
     Interest and fees on loans$18,939  $17,662  
     Interest on deposits with other banks111  122  
     Interest on investment securities - taxable666  879  
     Interest on tax exempt loans and securities983  960  
     Total interest income20,699  19,623  
INTEREST EXPENSE
     Interest on deposits3,910  4,123  
     Interest on repurchase agreements10  14  
     Interest on FHLB and other borrowings573  1,229  
     Interest on subordinated debt35  285  
     Total interest expense4,528  5,651  
NET INTEREST INCOME16,171  13,972  
     Provision for loan losses1,138  300  
     Net interest income after provision for loan losses15,033  13,672  
NONINTEREST INCOME
     Service charges on deposit accounts450  315  
     Income on bank owned life insurance223  525  
     Interchange and debit card transaction fees100  141  
     Mortgage fee income11,219  6,670  
     Gain on sale of portfolio loans130  55  
     Insurance and investment services income207  156  
     Gain (loss) on sale of available-for-sale securities, net276  (118) 
     (Loss) gain on derivatives, net(3,562) 450  
     Commercial swap fee income320  80  
     Holding gain on equity securities14  180  
     Compliance consulting income1,009  —  
     Other operating income464  311  
     Total noninterest income10,850  8,765  
NONINTEREST EXPENSES
     Salary and employee benefits16,182  11,734  
     Occupancy expense1,220  1,185  
     Equipment depreciation and maintenance877  854  
     Data processing and communications1,163  988  
     Mortgage processing851  809  
     Marketing, contributions, and sponsorships336  214  
     Professional fees1,331  828  
     Printing, postage, and supplies177  135  
     Insurance, tax, and assessment expense464  505  
     Travel, entertainment, dues, and subscriptions1,218  690  
     Other operating expenses837  506  
     Total noninterest expense24,656  18,448  
Income before income taxes1,227  3,989  
Income tax expense179  797  
Net income1,048  3,192  
Preferred dividends114  121  
Net income available to common shareholders$934  $3,071  
Earnings per share - basic$0.08  $0.26  
Earnings per share - diluted$0.08  $0.26  
Weighted average shares outstanding - basic11,942,767  11,607,543  
Weighted average shares outstanding - diluted12,298,092  13,177,281  
See accompanying notes to unaudited consolidated financial statements.
4

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Three Months Ended March 31
20202019
Net Income  $1,048  $3,192  
Other comprehensive (loss) income: 
Unrealized holding gains on securities available-for-sale  1,414  1,859  
Income tax effect  (382) (502) 
Reclassification adjustment for (gain) loss recognized in income (276) 118  
Income tax effect  75  (32) 
Change in defined benefit pension plan  (706) (332) 
Income tax effect  190  90  
Reclassification adjustment for amortization of net actuarial loss recognized in income   105  68  
Income tax effect  (28) (18) 
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income(1,793) (458) 
Income tax effect  484  124  
Total other comprehensive (loss) income (917) 917  
Comprehensive income  $131  $4,109  

See accompanying notes to unaudited consolidated financial statements.

5

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) (Dollars in thousands except per share data)
 Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTreasury StockTotal Stockholders' Equity
Balance at December 31, 20187,834  11,658  116,897  48,274  (6,806) (1,084) 176,773  
Net Income—  —  —  3,192  —  —  3,192  
Other comprehensive income—  —  —  —  917  —  917  
Cash dividends paid ($0.035 per common share)—  —  —  (408) —  —  (408) 
Dividends on preferred stock—  —  —  (121) —  —  (121) 
Stock based compensation—  —  425  —  —  —  425  
Common stock options exercised—  8  86  —  —  —  94  
Balance at March 31, 2019$7,834  $11,666  $117,408  $50,937  $(5,889) $(1,084) $180,872  
Balance at December 31, 2019$7,334  $11,995  $122,516  $72,496  $(1,321) $(1,084) $211,936  
Net Income—  —  —  1,048  —  —  1,048  
Other comprehensive loss—  —  —  —  (917) —  (917) 
Cash dividends paid ($0.09 per common share)—  —  —  (1,076) —  —  (1,076) 
Dividends on preferred stock—  —  —  (114) —  —  (114) 
Stock based compensation—  —  498  —  —  —  498  
Common stock options exercised—  3  35  —  —  —  38  
Common stock repurchased—  —  —  —  —  (260) (260) 
Balance at March 31, 2020$7,334  $11,998  $123,049  $72,354  $(2,238) $(1,344) $211,153  
See accompanying notes to unaudited consolidated financial statements.
6

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Three Months Ended March 31,
20202019
OPERATING ACTIVITIES  
Net Income  $1,048  $3,192  
Adjustments to reconcile net income to net cash (used in) provided by operating activities: 
     Net amortization and accretion of investments  302  280  
     Net amortization of deferred loan costs  114  72  
     Provision for loan losses  1,138  300  
     Depreciation and amortization  908  759  
     Stock based compensation  498  425  
     Loans originated for sale  (484,989) (239,160) 
     Proceeds of loans sold  419,868  255,682  
     Mortgage fee income  (11,219) (6,670) 
     Gain on sale of available-for-sale securities  (276) (33) 
     Loss on sale of available-for-sale securities  —  151  
     Gain on sale of portfolio loans  (130) (55) 
     Income on bank owned life insurance  (223) (525) 
     Deferred taxes  (929) 21  
     Amortization of operating lease right-of-use asset  8  20  
     Holding gain on equity securities  (14) (180) 
     Changes in other assets  (18,839) (16,801) 
     Changes in other liabilities  14,116  15,447  
     Net cash (used in) provided by operating activities (78,619) 12,925  
INVESTING ACTIVITIES  
     Purchases of investment securities available-for-sale  (16,325) (20,400) 
     Maturities/paydowns of investment securities available-for-sale  18,990  5,236  
     Sales of investment securities available-for-sale  10,318  13,694  
     Purchases of premises & equipment, including premises & equipment included in assets of branches held for sale  (1,384) (115) 
     Net increase in loans and loans included in assets of branches held for sale  (16,063) (36,866) 
     Purchases of restricted bank stock  (7,439) (6,119) 
     Redemptions of restricted bank stock  13,414  8,352  
     Proceeds from sale of other real estate owned  52  97  
     Proceeds from death benefit of bank owned life insurance policies  —  688  
     Purchase of equity securities  (498) (450) 
     Net cash provided by (used in) investing activities 1,065  (35,883) 
FINANCING ACTIVITIES  
     Net increase in deposits and deposits in branches held for sale  332,734  121,505  
     Net decrease in repurchase agreements  (826) (2,372) 
     Net change in FHLB & other borrowings  (192,070) (100,003) 
     Common stock options exercised  38  94  
     Common stock repurchased  (260) —  
     Cash dividends paid on common stock  (1,076) (408) 
     Cash dividends paid on preferred stock  (114) (121) 
     Net cash provided by financing activities  138,426  18,695  
Increase (decrease) in cash and cash equivalents 60,872  (4,263) 
Cash and cash equivalents at beginning of period  28,002  22,221  
Cash and cash equivalents at end of period  $88,874  $17,958  
Supplemental disclosure of cash flow information:  
     Loans transferred to other real estate owned  $23  $63  
     Initial recognition of operating lease right-of-use assets  —  12,935  
     Initial recognition of operating lease liabilities  —  15,659  
     Cashless stock options exercised  35  —  
Cash payments for:  
     Interest on deposits, repurchase agreements and borrowings  $5,511  $6,136  

See accompanying notes to unaudited consolidated financial statements.
7

Notes to the Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly owned subsidiary, MVB Bank, Inc. (“MVB Bank” or the “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 (“MVB 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, 2019 has been derived from audited financial statements included in the Company’s 2019 filing on Form 10-K. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019, 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.

Assets and Liabilities of Branches Held for Sale

On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, personal property, and other fixed assets associated with the branch locations. The Company closed this transaction on April 24, 2020.

Assets to be acquired and liabilities to be assumed are summarized as follows:
(Dollars in thousands)As of March 31, 2020,As of December 31, 2019,
Loans$35,206  $42,916  
Premises and equipment, net3,931  3,638  
Assets of branches held for sale$39,137  $46,554  
Noninterest-bearing deposits$21,991  $19,251  
Interest-bearing deposits165,816  169,019  
Deposits of branches held for sale$187,807  $188,270  
8


Mortgage Business Combination

On March 2, 2020, the Bank and PMG (dba MVB Mortgage), entered into an Agreement by and among the Bank, PMG, Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the mortgage origination services businesses of PMG and Intercoastal.

Pursuant to the terms of the Agreement, on the closing date, Intercoastal will convert into a Virginia limited liability company and PMG will contribute substantially all of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of Intercoastal, representing 47% of the common interest of Intercoastal, as well as $7.5 million in preferred units (the “Transaction”). The completion of the Transaction is subject to certain regulatory approvals, conditions precedent and normal customary closing conditions. Subject to the satisfaction of such conditions, the Transaction is expected to close in mid-2020. In the Agreement, the Bank, MVB Mortgage, and Intercoastal have made customary representations, warranties, and covenants, including covenants to enter into ancillary agreements related to the Transaction and the operation of the business following the completion of the Transaction. MVB will recognize its ownership as a fair value equity investment and will no longer consolidate MVB Mortgage’s financial results.

Coronavirus Disease (“COVID-19”) Pandemic

The consolidated financial statements contained in this Quarterly Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of March 31, 2020. During 2020, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures, and the reluctance of individuals to leave their homes as a result of the outbreak of COVID-19. The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its customers may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially impact the Company’s customers, providers, and third parties. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company is currently evaluating the impact on its consolidated financial statements and has not yet quantified what material impacts to the financial statements (if any) may result from the CARES Act. The CARES Act also established the Paycheck Protection Program (“PPP”), to be administered by the U.S. Small Business Administration (“SBA”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The PPP loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company is actively participating with the PPP, evaluating other programs available to assist our clients, and providing consumer deferrals consistent with government-sponsored enterprise (“GSE”) guidelines.

Note 2 – Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 715-20 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: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; 4) related party disclosures about the amount of future annual benefits covered
9

by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; 5) 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 6) 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: 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) 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 additions, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements, and 4) 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: 1) 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 2) 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: 1) 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; 2) 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 3) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company adopted this standard and there was no material impact.

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, in May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, and in November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, 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 was initially 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 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. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments – Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay in the effective date of the
10

standard for smaller reporting companies until January 2023. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable.

Note 3 – Investment Securities

There were no held-to-maturity securities at March 31, 2020 or December 31, 2019.

Amortized cost and fair values of investment securities available-for-sale at March 31, 2020 are summarized as follows:
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
U. S. Agency securities$37,101  $483  $(218) $37,366  
U.S. Sponsored Mortgage-backed securities56,229  1,159  (34) 57,354  
Municipal securities112,940  3,818  (139) 116,619  
Total debt securities206,270  5,460  (391) 211,339  
Other securities11,662  141  (41) 11,762  
Total investment securities available-for-sale$217,932  5,601  $(432) $223,101  

Amortized cost and fair values of investment securities available-for-sale at December 31, 2019 are summarized as follows:
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
U. S. Agency securities$52,046  $199  $(249) $51,996  
U.S. Sponsored Mortgage-backed securities58,748  188  (624) 58,312  
Municipal securities108,750  4,399  (57) 113,092  
Total debt securities219,544  4,786  (930) 223,400  
Other securities12,247  181  (7) 12,421  
Total investment securities available-for-sale$231,791  $4,967  $(937) $235,821  

The following table summarizes amortized cost and fair values of debt securities by contractual maturity:
March 31, 2020
Available for sale
(Dollars in thousands)Amortized CostFair Value
Within one year$90  $91  
After one year, but within five7,985  8,274  
After five years, but within ten29,781  30,646  
After ten years168,414  172,328  
Total$206,270  $211,339  

Investment securities with a carrying value of $74.4 million at March 31, 2020, were pledged to secure public funds, repurchase agreements, and potential borrowings at the Federal Reserve discount window.

The Company’s investment portfolio includes securities that are in an unrealized loss position as of March 31, 2020, the details of which are included in the following table. Although these securities, if sold at March 31, 2020 would result in a pretax loss of $432 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 March 31, 2020, the Company considers all securities
11

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 March 31, 2020:
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. Agency securities (22)$4,693  $(51) $14,041  $(167) 
U.S. Sponsored Mortgage-backed securities (10)1,655  (5) 7,544  (29) 
Municipal securities (12)6,668  (127) 830  (12) 
Other securities (5)4,059  (41) —  —  
$17,075  $(224) $22,415  $(208) 

The following table discloses investments in an unrealized loss position at December 31, 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)$8,160  $(59) $15,399  $(190) 
U.S. Sponsored Mortgage-backed securities (40)16,660  (170) 27,498  (454) 
Municipal securities (13)6,018  (40) 828  (17) 
Other securities (2)1,093  (7) —  —  
$31,931  $(276) $43,725  $(661) 

For the three-month periods ended March 31, 2020 and 2019, the Company sold investments available-for-sale of $10.3 million and $13.7 million, respectively. These sales resulted in gross gains of $276 thousand and $33 thousand and gross losses of $0 and $151 thousand, respectively.

For the three-month periods ended March 31, 2020 and 2019, the Company did not sell any equity investments.

For the three-month periods ended March 31, 2020 and 2019, the Company recognized unrealized holding gains on equity securities of $14 thousand and $180 thousand, respectively. These were 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 March 31, 2020 and December 31, 2019, were as follows:
(Dollars in thousands)March 31, 2020December 31, 2019
Commercial and Non-Residential Real Estate$1,094,494  $1,063,828  
Residential Real Estate261,493  271,604  
Home Equity36,856  35,106  
Consumer3,763  3,697  
Total Loans$1,396,606  $1,374,235  
Deferred loan origination fees and costs, net(28) 306  
Loans receivable$1,396,578  $1,374,541  

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 an original 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.
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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 $2.4 million and $2.0 million, while the related reserves were $77 thousand and $139 thousand as of March 31, 2020 and December 31, 2019. Such collectively evaluated impaired loans are included in total loans individually evaluated for impairment and in total impaired loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by qualified factors.

The segments described below in the impaired loans by class table, which are based on the federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and bank management tracks the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling 12 quarters.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews, audits, and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions, consumer sentiment, and other external factors. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.

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

Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. As of March 31, 2020 and December 31, 2019, the liability for unfunded commitments related to loans held for investment was $332 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
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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 March 31, 2020:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
December 31, 2019$10,098  $1,272  $327  $78  $11,775  
     Charge-offs(1,756) —  —  —  (1,756) 
     Recoveries—  —  2  2  4  
     Provision (recovery)1,255  —  (93) (24) 1,138  
ALL balance at March 31, 2020$9,597  $1,272  $236  $56  $11,161  
Individually evaluated for impairment$532  $—  $—  $—  $532  
Collectively evaluated for impairment$9,065  $1,272  $236  $56  $10,629  

The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2020:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$7,737  $2,385  $104  $—  $10,226  
     Collectively evaluated for impairment1,086,757  259,108  36,752  3,763  1,386,380  
Total Loans1,094,494  261,493  36,856  3,763  1,396,606  

The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
December 31, 2018$8,605  $1,405  $684  $245  $10,939  
     Charge-offs—  —  —  —  —  
     Recoveries—  1  1  1  3  
     Provision 259  11  19  11  300  
ALL balance at March 31, 2019$8,864  $1,417  $704  $257  $11,242  
Individually evaluated for impairment$1,123  $—  $—  $—  $1,123  
Collectively evaluated for impairment$7,741  $1,417  $704  $257  $10,119  

The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$9,914  $2,890  $121  $36  $12,961  
     Collectively evaluated for impairment952,150  307,823  58,554  9,433  1,327,960  
Total Loans$962,064  $310,713  $58,675  $9,469  $1,340,921  

Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company evaluates residential mortgage loans, home equity lines of credit, and consumer loans in homogeneous pools, rather than on an individual basis, when each of those loans are below specific thresholds based on outstanding principal balance. Such loans that individually exceed these thresholds are evaluated individually for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.

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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 Company currently manages its loan portfolios and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are as follows:

Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs, as well as to finance owner occupied real estate, and to finance future cash flows of Federal Government lease contracts. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. This segment includes both company originated and purchased participation loans. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties such as investment properties for retail, office and multifamily with a history of occupancy and cash flow. This segment includes both company originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial acquisition, development and construction loans – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties, including the construction of single-family dwellings, and also includes loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

Residential mortgage loans – This residential real estate subsegment contains permanent and construction mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Credit risk arises from the borrower’s, and where applicable the builder's, continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Home equity lines of credit – This segment includes subsegment for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

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The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2020 and December 31, 2019:
 Impaired Loans with Specific AllowanceImpaired Loans with No Specific AllowanceTotal Impaired Loans
(Dollars in thousands)Recorded InvestmentRelated AllowanceRecorded InvestmentRecorded InvestmentUnpaid Principal Balance
March 31, 2020
Commercial
     Commercial Business$2,598  $240  $698  $3,296  $4,407  
     Commercial Real Estate1,774  284  625  2,399  2,497  
     Acquisition & Development1,658  8  384  2,042  3,442  
          Total Commercial6,030  532  1,707  7,737  10,346  
Residential—  —  2,385  2,385  2,495  
Home Equity—  —  104  104  113  
Consumer—  —  —  —  —  
          Total Impaired Loans$6,030  $532  $4,196  $10,226  $12,954  
December 31, 2019
Commercial
     Commercial Business$2,606  $249  $644  $3,250  $4,308  
     Commercial Real Estate1,786  325  295  2,081  2,171  
     Acquisition & Development—  —  2,070  2,070  3,467  
          Total Commercial4,392  574  3,009  7,401  9,946  
Residential—  —  1,953  1,953  2,045  
Home Equity—  —  95  95  100  
Consumer—  —  34  34  35  
          Total Impaired Loans$4,392  $574  $5,091  $9,483  $12,126  

Impaired loans have increased by $743 thousand, or 7.8%, during the three months ended March 31, 2020. This change is the net effect of multiple factors, including the identification of $980 thousand of impaired loans, curtailments of $64 thousand, the foreclosure of one consumer loan which required the reclassification of $23 thousand to other real estate owned, the reclassification of $6 thousand to performing loans based on improved repayment performance, and normal loan amortization of $145 thousand.

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
Three Months Ended March 31, 2020
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$3,261  $—  $—  
  Commercial Real Estate2,898  26  23  
  Acquisition & Development2,048  29  19  
    Total Commercial8,207  55  42  
Residential2,382  5  5  
Home Equity101  —  —  
Consumer19  —  —  
Total$10,709  $60  $47  

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Three Months Ended March 31, 2019
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$3,608  $—  $—  
  Commercial Real Estate4,038  40  39  
  Acquisition & Development2,215  31  29  
    Total Commercial9,861  71  68  
Residential2,858  3  3  
Home Equity122  1  1  
Consumer79  —  —  
Total$12,920  $75  $72  

As of March 31, 2020, the Bank’s other real estate owned balance totaled $1.2 million. The Bank held four foreclosed residential real estate properties representing $380 thousand, or 32%, of the total balance of other real estate owned. These properties are held primarily as a result of the foreclosures of one commercial loan relationship, which included two properties for a total of $294 thousand. The two remaining residential real estate properties, totaling $86 thousand, were the result of the foreclosure of two unrelated borrowers. The remaining $826 thousand, or 68%, of other real estate owned is the result of the foreclosure of two unrelated commercial development loans. There are four additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $214 thousand as of March 31, 2020. These loans are included in the table above and have no specific allowance allocated to them.

As of March 31, 2019, the Bank’s other real estate owned balance totaled $2.1 million. The Bank held twelve foreclosed residential real estate properties representing $877 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 two properties for a total of $294 thousand, while the other included seven properties for a total of $174 thousand. The three remaining residential real estate properties, totaling $409 thousand, were the result of the foreclosure of three unrelated borrowers. The remaining $1.2 million, or 58%, of other real estate owned is the result of the foreclosure of three unrelated commercial development loans. There are three additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $270 thousand as of March 31, 2019. These loans are included in the table above and have no specific allowance allocated to them.

Bank management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all commercial relationships of one million dollars or greater is performed annually.

Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Bank’s Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

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The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
March 31, 2020
Commercial
     Commercial Business$516,247  $17,697  $12,762  $—  $546,706  
     Commercial Real Estate427,108  3,177  1,856  —  432,141  
     Acquisition & Development110,996  1,811  2,840  —  115,647  
          Total Commercial1,054,351  22,685  17,458  —  1,094,494  
Residential256,934  1,172  3,275  112  261,493  
Home Equity36,336  416  104  —  36,856  
Consumer3,724  39  —  —  3,763  
          Total Loans$1,351,345  $24,312  $20,837  $112  $1,396,606  
December 31, 2019
Commercial
     Commercial Business$511,590  $17,398  $11,894  $—  $540,882  
     Commercial Real Estate406,712  3,564  1,494  —  411,770  
     Acquisition & Development106,428  1,869  2,879  —  111,176  
          Total Commercial1,024,730  22,831  16,267  —  1,063,828  
Residential267,367  1,946  2,177  114  271,604  
Home Equity34,641  383  82  —  35,106  
Consumer3,613  56  28  —  3,697  
          Total Loans$1,330,351  $25,216  $18,554  $114  $1,374,235  

Loans classified as Special Mention totaled $24.3 million and $25.2 million as of March 30, 2020 and December 31, 2019, respectively. The decrease of $904 thousand, or 3.6%, was concentrated in the residential mortgage loan portfolio. This decrease is primarily the result of the risk grade downgrade of ten loans to unrelated borrowers, totaling $751 thousand, and normal loan amortization of the loans in this classification. While the total of Special Mention commercial loans decreased by only $146 thousand, two unrelated loans were the cause of offsetting changes to this loan classification. More specifically, a $2.2 million owner occupied commercial real estate loan was downgraded to Special Mention as a result of continued financial difficulties caused by less-than-expected enrollment in the school that occupies the property. Meanwhile, Special Mention commercial loans decreased by $1.8 million due to the charge off of a government lease finance loan stemming from the non-renewal of the underlying lease agreement. These matters are being monitored and any significant developments will result in reevaluation of the risk grades, where appropriate, and the potential recognition of future recoveries.

Loans classified as Substandard totaled $20.8 million and $18.6 million as of March 30, 2020 and December 31, 2019, respectively. The increase of $2.2 million, or 12%, was concentrated in the residential mortgage loan portfolio. The increase is primarily the result of the risk grade downgrade of twelve loans to two unrelated borrowers, totaling $1.2 million. Of the twelve loans recently classified as Substandard, ten loans totaling $751 thousand were downgraded as a result of long-term erratic payment performance that has required non-accrual status of these loans. Meanwhile, the total of Substandard commercial loans increased by $1.2 million as a result of the risk grade downgrade of nine unrelated loans totaling $834 thousand, and the $543 thousand increase in the outstanding balance of a performing Substandard loan, which is classified due to identified operational risks. 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
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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 on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or MLC.

The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and non-accrual loans as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal LoansNon-Accrual90+ Days Still Accruing
March 31, 2020
Commercial
     Commercial Business$542,438  $4,150  $—  $118  $4,268  $546,706  $2,896  $—  
     Commercial Real Estate431,478  485  —  178  663  432,141  625  —  
     Acquisition & Development115,371  —  —  276  276  115,647  384  —  
          Total Commercial1,089,287  4,635  —  572  5,207  1,094,494  3,905  —  
Residential257,556  3,100  —  837  3,937  261,493  1,900  —  
Home Equity36,496  232  34  94  360  36,856  104  —  
Consumer3,640  123  —  —  123  3,763  —  —  
          Total Loans$1,386,979  $8,090  $34  $1,503  $9,627  $1,396,606  $5,909  $—  
December 31, 2019
Commercial
     Commercial Business$537,602  $3,189  $47  $44  $3,280  $540,882  $2,848  $—  
     Commercial Real Estate411,070  522  178  —  700  411,770  295  —  
     Acquisition & Development110,717  180  —  279  459  111,176  390  —  
          Total Commercial1,059,389  3,891  225  323  4,439  1,063,828  3,533  —  
Residential267,515  3,003  549  537  4,089  271,604  1,461  —  
Home Equity34,382  545  84  95  724  35,106  95  —  
Consumer3,610  1  58  28  87  3,697  34  —  
          Total Loans$1,364,896  $7,440  $916  $983  $9,339  $1,374,235  $5,123  $—  

Troubled Debt Restructurings

The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. At March 31, 2020 and December 31, 2019, the Bank had specific reserve allocations for TDR’s of $436 thousand and $527 thousand, respectively.

Loans considered to be troubled debt restructured loans totaled $7.9 million and $7.7 million as of March 31, 2020 and December 31, 2019, respectively. Of these totals, $4.3 million and $4.4 million, respectively, represent accruing troubled debt restructured loans and represent 42% and 46%, respectively of total impaired loans. Meanwhile, as of March 31, 2020, $3.0 million represent four loans to two borrowers that have defaulted under the restructured terms. The largest of these loans, at $2.3 million, is a commercial loan to a company dependent of the coal industry. The other three of these loans, totaling $669 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. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of March 31, 2020 and December 31, 2019.

Four commercial loans to three unrelated borrowers totaling $313 thousand were classified as TDR’s in the three months ended March 31, 2020. Upon the identification of financial difficulties on the part of the borrowers, the two related loans were modified
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to extend the maturity date and allow for additional monitoring, while the other two unrelated loans were modified to lower loan principal and interest payments. These loans have paid as agreed under their modified terms.

During the quarter ended March 31, 2020, no restructured loan defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms.

New TDR's 1
Three Months Ended March 31, 2020
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business2  $154  $149  
     Commercial Real Estate2  159  159  
     Acquisition & Development—  —  —  
          Total Commercial4  313  308  
Residential—  —  —  
Home Equity—  —  —  
Consumer—  —  —  
          Total4  $313  $308  

Three Months Ended March 31, 2019
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business1  $268  $267  
     Commercial Real Estate—  —  —  
     Acquisition & Development—  —  —  
          Total Commercial1  268  267  
Residential—  —  —  
Home Equity—  —  —  
Consumer—  —  —  
          Total1  $268  $267  
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.
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Note 5 – Premises and Equipment

Premises and equipment were as follows:

(Dollars in thousands)March 31, 2020December 31, 2019
Land$3,510  $3,257  
Buildings and improvements14,452  14,574  
Furniture, fixtures and equipment17,164  16,869  
Construction in progress1,662  1,019  
Leasehold improvements2,216  2,207  
39,004  37,926  
Accumulated depreciation(16,675) (15,952) 
Net premises and equipment$22,329  $21,974  

The Company leases certain premises and equipment under operating and finance leases. At March 31, 2020, the Company had lease liabilities totaling $17.4 million and right-of-use assets totaling $16.0 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2020, the weighted average remaining lease term for finance leases was 2.4 years and the weighted average discount rate used in the measurement of finance lease liabilities was 2.80%. For the three months ended March 31, 2020, the weighted average remaining lease term for operating leases was 12.6 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.63%.

Lease costs were as follows:
(Dollars in thousands)Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Amortization of right-of-use assets, finance leases$18  $20  
Interest on lease liabilities, finance leases12
Operating lease cost544530
Short-term lease cost1425
Variable lease cost1010
Total lease cost$587  $587  

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2020.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as follows:
March 31, 2020
(Dollars in thousands)Finance LeasesOperating Leases
2020$77  $2,021  
202177  2,017  
202232  1,872  
2023—  1,629  
2024—  1,585  
2025 and thereafter—  12,746  
Total future minimum lease payments$186  $21,870  
Less: Amounts representing interest(6) (4,692) 
Present value of net future minimum lease payments$180  $17,178  

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Note 6 – Deposits

Deposits were as follows:
(Dollars in thousands)March 31, 2020December 31, 2019
Noninterest-bearing demand$387,536  $278,547  
Interest-bearing demand375,024  351,435  
Savings and money markets378,838  363,026  
Time deposits, including CDs and IRAs456,841  272,034  
Total deposits$1,598,239  $1,265,042  
Time deposits that meet or exceed the FDIC insurance limit$8,382  $8,955  

Maturities of time deposits were as follows:
(Dollars in thousands)March 31, 2020
2020$336,219  
202167,491  
202232,344  
202313,558  
20247,229  
Total$456,841  


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 $0 at March 31, 2020, compared to $192.1 million at December 31, 2019.

Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)As of and for the three months ended March 31, 2020As of and for the year ended December 31, 2019
Balance at end of period$—  $192,063  
Average balance during the period160,429  187,226  
Maximum month-end balance124,631  240,811  
Weighted-average rate during the period0.92 %2.24 %
Weighted-average rate at end of period0.36 %1.81 %
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 repurchase agreements 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.
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All of the Company’s repurchase agreements were overnight agreements at March 31, 2020 and December 31, 2019. These borrowings were collateralized with investment securities with a carrying value of $9.7 million and $10.5 million at March 31, 2020 and December 31, 2019, 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 $9.3 million at March 31, 2020, compared to $10.2 million at December 31, 2019.

Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)As of and for the three months ended March 31, 2020As of and for the year ended December 31, 2019
Balance at end of period$9,346  $10,172  
Average balance during the period9,520  11,252  
Maximum month-end balance9,788  14,655  
Weighted-average rate during the period0.44 %0.43 %
Weighted-average rate at end of period0.13 %0.44 %

Long-term notes from the FHLB were as follows:
(Dollars in thousands)March 31, 2020December 31, 2019
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$815  $822  
Fixed interest rate notes, originating in November 2019, due between November 2022 and November 2024, with interest of between 1.74% and 1.81% payable monthly30,000  30,000  
 $30,815  $30,822  
Subordinated Debt

Information related to subordinated debt is summarized as follows:
(Dollars in thousands)As of and for the three months ended March 31, 2020As of and for the year ended December 31, 2019
Balance at end of period$4,124  $4,124  
Average balance during the period4,124  12,125  
Maximum month-end balance4,124  17,524  
Weighted-average rate during the period3.35 %6.35 %
Weighted-average rate at end of period2.36 %3.51 %

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”).

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

The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors of the Federal Reserve System, the Company may, after the Notes have been outstanding for 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 March 31, 2020, all subordinated debt notes have been converted or redeemed.

The Company reflects subordinated debt in the amount of $4.1 million as of March 31, 2020 and $4.1 million as of December 31, 2019 and interest expense of $35 thousand and $285 thousand for the three months ended March 31, 2020 and 2019.

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.

In 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
2020$22  
202132  
202210,761  
202310,000  
202410,000  
Thereafter4,124  
 $34,939  

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 2019 Annual Report on Form 10-K.

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 following measurements are made on a recurring basis.

•Available-for-sale investment securities – Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds, and corporate debt securities. There have been no changes in valuation techniques for the three months ended March 31, 2020. 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. The Company classified investments in government securities as Level II instruments and valued them using the market approach.

•Equity securities – Certain equity securities are recorded at fair value on both a recurring and 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.
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The valuation methodologies utilized may include significant unobservable inputs. There have been no changes in valuation techniques for the three months ended March 31, 2020. Valuation techniques are consistent with techniques used in prior periods.

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

•Interest rate lock commitments – 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 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.

The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2020 and December 31, 2019 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 March 31, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $37,366  $—  $37,366  
     U.S. Sponsored Mortgage backed securities—  57,354  —  57,354  
     Municipal securities—  79,993  36,626  116,619  
     Other securities—  11,762  —  11,762  
     Equity securities512  —  —  512  
     Loans held for sale—  186,128  —  186,128  
     Interest rate lock commitment—  —  5,791  5,791  
     Interest rate swap—  15,733  —  15,733  
     Fair value hedge—  1,447  —  1,447  
     Bank-owned life insurance—  35,597  —  35,597  
Liabilities:
     Interest rate swap—  15,733  —  15,733  
     Fair value hedge—  2,922  —  2,922  
     Mortgage-backed security hedges—  5,317  —  5,317  
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 December 31, 2019
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $51,996  $—  $51,996  
     U.S. Sponsored Mortgage backed securities—  58,312  —  58,312  
     Municipal securities—  75,833  37,259  113,092  
     Other securities—  12,421  —  12,421  
     Loans held for sale—  109,788  —  109,788  
     Interest rate lock commitment—  —  1,660  1,660  
     Interest rate swap—  5,722  —  5,722  
     Fair value hedge—  1,770  —  1,770  
     Bank-owned life insurance—  35,374  —  35,374  
Liabilities:
     Interest rate swap—  5,722  —  5,722  
     Fair value hedge—  1,418  —  1,418  
     Mortgage-backed security hedges—  186  —  186  

The following table represents recurring level III assets:
(Dollars in thousands)Interest Rate Lock CommitmentsMunicipal SecuritiesEquity SecuritiesTotal
Balance at December 31, 2019$1,660  $37,259  $—  $38,919  
Realized and unrealized gains included in earnings4,131  —  —  4,131  
Purchase of securities—  522  —  522  
Unrealized loss included in other comprehensive income (loss)—  (1,155) —  (1,155) 
Balance at March 31, 2020$5,791  $36,626  $—  $42,417  
Balance at December 31, 2018$1,750  $33,122  $300  $35,172  
Realized and unrealized gains included in earnings506  —  —  506  
Purchase of securities—  —  450  450  
Unrealized gain included in other comprehensive income (loss)—  5,012  —  5,012  
Unrealized loss included in other comprehensive income (loss)—  (1,333) —  (1,333) 
Balance at March 31, 2019$2,256  $36,801  $750  $39,807  

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 2020 and 2019 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.

•Impaired loans – Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually
27

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 – Certain equity securities are recorded at fair value on a nonrecurring basis. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.

Assets measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019 are included in the table below:
March 31, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$—  $—  $9,694  $9,694  
Other real estate owned—  —  1,206  1,206  
Equity securities—  —  18,514  18,514  

December 31, 2019
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$—  $—  $8,909  $8,909  
Other real estate owned—  —  1,397  1,397  
Equity securities—  —  18,514  18,514  

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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 March 31, 2020 and December 31, 2019.
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
March 31, 2020
Nonrecurring measurements:
Impaired loans$9,694  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$1,206  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Equity securities$18,514  Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities (Local TIF bonds)$36,626  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
Interest rate lock commitments$5,791  Pricing modelPull through rates78% - 84%
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
December 31, 2019
Nonrecurring measurements:
Impaired loans$8,909  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$1,397  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Equity securities$18,514  Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities (Local TIF bonds)$37,259  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
Interest rate lock commitments$1,660  Pricing modelPull through rates77% - 82%
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)
March 31, 2020
Financial assets:
     Cash and cash equivalents$88,874  $88,874  $88,874  $—  $—  
     Certificates of deposits with other banks12,549  12,584  —  12,584  —  
     Securities available-for-sale223,101  223,101  —  186,475  36,626  
     Equity securities19,026  19,026  512  —  18,514  
     Loans held for sale186,128  186,128  —  186,128  —  
     Loans, net1,385,417  1,386,857  —  —  1,386,857  
     Mortgage servicing rights344  344  —  —  344  
     Interest rate lock commitment5,791  5,791  —  —  5,791  
     Interest rate swap15,733  15,733  —  15,733  —  
     Accrued interest receivable8,445  8,445  —  1,702  6,743  
     Bank-owned life insurance35,597  35,597  —  35,597  —  
Financial liabilities:
     Deposits$1,598,239  $1,594,168  $—  $1,594,168  $—  
     Repurchase agreements9,346  9,346  —  9,346  —  
     FHLB and other borrowings30,815  30,818  —  30,818  —  
     Mortgage-backed security hedges5,317  5,317  —  5,317  —  
     Interest rate swap15,733  15,733  —  15,733  —  
     Fair value hedge2,922  2,922  —  2,922  —  
     Accrued interest payable808  808  —  808  —  
     Subordinated debt4,124  4,124  —  4,124  —  
December 31, 2019
Financial assets:
     Cash and cash equivalents$28,002  $28,002  $28,002  $—  $—  
     Certificates of deposits with other banks12,549  12,586  —  12,586  —  
     Securities available-for-sale235,821  235,821  —  198,562  37,259  
     Equity securities18,514  18,514  —  —  18,514  
     Loans held for sale109,788  109,788  —  109,788  —  
     Loans, net1,362,766  1,364,706  —  —  1,364,706  
     Mortgage servicing rights348  348  —  —  348  
     Interest rate lock commitment1,660  1,660  —  —  1,660  
     Interest rate swap5,722  5,722  —  5,722  —  
     Fair value hedge1,770  1,770  —  1,770  
     Accrued interest receivable7,909  7,909  —  1,591  6,317  
     Bank-owned life insurance35,374  35,374  —  35,374  —  
Financial liabilities:
     Deposits$1,265,042  $1,249,135  $—  $1,249,135  $—  
     Repurchase agreements10,172  10,172  —  10,172  —  
     FHLB and other borrowings222,885  222,891  —  222,891  —  
     Mortgage-backed security hedges186  186  —  186  —  
     Interest rate swap5,722  5,722  —  5,722  —  
     Fair value hedge1,418  1,418  —  1,418  —  
     Accrued interest payable1,060  1,060  —  1,060  —  
     Subordinated debt4,124  4,124  —  4,124  —  

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Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of 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 August 12, 2019, the Board of Directors of the Company announced the approval of a stock repurchase program. Under the program, the Company is authorized to repurchase up to $5.0 million of its outstanding shares of common stock over the next 12 months or until the purchase is fully absorbed, whichever date comes first on the open market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any specified number of shares of its common stock, and it may be discontinued, suspended, or restarted at any time at the Company's discretion.

In March 2020, the Company repurchased 16,300 shares of its outstanding common stock, with an average share price of $16.00.

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.
 Three Months Ended March 31
(Dollars in thousands except shares and per share data)20202019
Numerator for basic earnings per share:
Net income$1,048  $3,192  
Less: Dividends on preferred stock114  121  
Net income available to common shareholders - basic$934  $3,071  
Numerator for diluted earnings per share:
Net income available to common shareholders - basic$934  $3,071  
Add: Dividends on convertible preferred stock—  121  
Add: Interest on subordinated debt (tax effected)—  184  
Net income available to common shareholders - diluted$934  $3,376  
Denominator:
Total average shares outstanding11,942,767  11,607,543  
Effect of dilutive convertible preferred stock—  489,625  
Effect of dilutive convertible subordinated debt—  837,500  
Effect of dilutive stock options and restricted stock units355,325  242,613  
Total diluted average shares outstanding12,298,092  13,177,281  
Earnings per share - basic$0.08  $0.26  
Earnings per share - diluted$0.08  $0.26  

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For the three months ended March 31, 2020 and 2019, approximately 366 thousand and 385 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 three months ended March 31, 2020 and 2019, approximately 77 thousand and 43 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.

Information about the reportable segments and reconciliation to the consolidated financial statements for the three-month periods ended March 31, 2020 and March 31, 2019 are as follows:

Three Months Ended March 31, 2020Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$18,774  $2,418  $1  $(494) $20,699  
Interest expense3,838  1,387  35  (732) 4,528  
Net interest income14,936  1,031  (34) 238  16,171  
Provision for loan losses1,132  6  —  —  1,138  
Net interest income after provision for loan losses13,804  1,025  (34) 238  15,033  
Noninterest Income:
Mortgage fee income110  11,347  —  (238) 11,219  
Other income3,346  (3,562) 1,504  (1,657) (369) 
Total noninterest income3,456  7,785  1,504  (1,895) 10,850  
Noninterest Expenses:         
Salaries and employee benefits5,866  7,884  2,432  —  16,182  
Other expense6,659  2,397  1,075  (1,657) 8,474  
Total noninterest expenses12,525  10,281  3,507  (1,657) 24,656  
Income (loss) before income taxes4,735  (1,471) (2,037) —  1,227  
Income tax expense (benefit)1,012  (349) (484) —  179  
Net income (loss)$3,723  $(1,122) $(1,553) $—  $1,048  
Preferred stock dividends—  —  114  —  114  
Net income (loss) available to common shareholders$3,723  $(1,122) $(1,667) $—  $934  
Capital Expenditures for the three-month period ended March 31, 2020$1,295  $69  $20  $—  $1,384  
Total Assets as of March 31, 20202,112,842  337,445  216,989  (567,596) 2,099,680  
Total Assets as of December 31, 20191,953,975  248,382  216,411  (474,654) 1,944,114  
Goodwill as of March 31, 20202,748  16,882  —  —  19,630  
Goodwill as of December 31, 20192,748  16,882  —  —  19,630  

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Three Months Ended March 31, 2019Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$18,327  $1,538  $1  $(243) $19,623  
Interest expense4,754  993  285  (381) 5,651  
Net interest income13,573  545  (284) 138  13,972  
Provision for loan losses247  53  —  —  300  
Net interest income after provision for loan losses13,326  492  (284) 138  13,672  
Noninterest income:
Mortgage fee income109  6,697  —  (136) 6,670  
Other income1,566  476  1,779  (1,726) 2,095  
Total noninterest income1,675  7,173  1,779  (1,862) 8,765  
Noninterest Expense:
Salaries and employee benefits4,395  5,159  2,180  —  11,734  
Other expense5,352  2,025  1,061  (1,724) 6,714  
Total noninterest expenses9,747  7,184  3,241  (1,724) 18,448  
Income (loss) before income taxes5,254  481  (1,746) —  3,989  
Income tax expense (benefit)1,054  146  (403) —  797  
Net income (loss)$4,200  $335  $(1,343) $—  $3,192  
Preferred stock dividends—  —  121  —  121  
Net income (loss) available to common shareholders$4,200  $335  $(1,464) $—  $3,071  
Capital Expenditures for the three-month period ended March 31, 2019$89  $4  $22  $—  $115  
Total Assets as of March 31, 20191,790,725  175,218  197,191  (373,226) 1,789,908  
Total Assets as of December 31, 20181,753,932  165,430  196,537  (364,930) 1,750,969  
Goodwill as of March 31, 20191,598  16,882  —  —  18,480  
Goodwill as of December 31, 20181,598  16,882  —  —  18,480  

Commercial & Retail Banking

For the three months ended March 31, 2020, the Commercial & Retail Banking segment earned $3.7 million compared to $4.2 million in 2019.

Net interest income increased by $1.4 million, primarily the result of an increase of $646 thousand in interest and fees on loans, a decrease of $699 thousand in interest on FHLB and other borrowings, and a decrease of $213 thousand in interest on deposits. The increase in interest and fees on loans was the result of an increase of $146.8 million in the average balance of loans. The decrease in interest on deposits was the result of a decrease of 31-basis points in the cost of interest-bearing liabilities, even with an increase of $86.6 million in the average balance of deposits.

Noninterest income increased by $1.8 million which was the result of an increase of $1.0 million in consulting income, an increase of $396 thousand in the gain on sale of securities, and an increase of $240 thousand in commercial swap fee income These increases were partially offset by a decrease of $302 thousand in the income on bank-owned life insurance.

Noninterest expense increased by $2.8 million, primarily the result of an increase of $1.5 million in salaries and employee benefits expense, an increase of $430 thousand in professional fees, and an increase of $479 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, the build-out of other Company personnel, and the additional team members acquired as a result of the Chartwell acquisition during the third quarter of 2019.

In addition, provision expense increased $885 thousand due to the net impact of adjustments to the portfolio segmentation and changes in the level of recognized charge offs and historical loss rates.

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Mortgage Banking

For the three months ended March 31, 2020, the Mortgage Banking segment lost $1.1 million compared to earning $335 thousand in 2019.

With the decrease in U.S. Treasury and mortgage rates, MVB Mortgage saw a significant increase in originations during the first quarter 2020. Mortgage originations increased above normal averages in the fourth quarter 2019 and remained strong with a significant rise in March 2020. However, the Federal Reserve's stimulus, which included the purchase of $525 billion of Agency MBS, the primary vehicle used to hedge the locked pipeline, caused a decrease in the valuation of the MBS market. This volatility in valuation caused a decrease in the derivative asset of $3.6 million, which resulted in a net loss of $1.1 million at MVB Mortgage for the three months ended March 31, 2020. In addition, stress to the servicing market, caused by concerns around the length and commitment of deferral periods for residential mortgages, caused numerous servicing companies to pull back from the market which drove a reduction in premiums related to mortgage servicing rights. These reduced premiums also impacted the valuation of the derivative.

Net interest income increased $486 thousand, which was the result of an increase of $880 thousand in interest and fees on loans, which was partially offset by an increase of $394 thousand in interest on borrowings. The increase in interest and fees on loans was due to an increase of $85.2 million in average real estate loans. The increase in interest on FHLB and other borrowings was due to an increase of $81.0 million in average borrowings.

Noninterest income increased by $612 thousand, primarily the result of an increase of $4.7 million in mortgage fee income and a decrease of $4.0 million in the gain on derivatives. The increase in mortgage fee income of $4.7 million is driven by an increase of $171.7 million in mortgage loans sold for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease in the gain on derivatives of $4.0 million was largely the result of the volatility of rates due to the COVID-19 pandemic. Loan originations spiked during early March when Treasury yields were at an all-time low. Mortgage rates were "locked-in" near lows offering lower yields. As discussed above, the mark to market loss is attributable to instability in the market for MBS and mortgage servicing rights.

Noninterest expense increased by $3.1 million, which was the result of an increase of $2.7 million in salaries and employee benefits expense, due to an increase in mortgage production, and an increase of $246 thousand in professional fees.

Financial Holding Company

For the three months ended March 31, 2020, the Financial Holding Company segment lost $1.6 million compared to a loss of $1.3 million in 2019. Interest expense decreased $250 thousand, noninterest income decreased $275 thousand, and noninterest expense increased $266 thousand. In addition, the income tax benefit increased $81 thousand. The decrease in interest expense was due to a $250 thousand decrease in interest on subordinated debt. The decrease in noninterest income was primarily the result of a decrease of $163 thousand in intercompany services income related to Regulation W. The increase in noninterest expense was primarily the result of an increase of $252 thousand in salaries and employee benefits expenses.

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%.

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Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of March 31, 2020 and 2019 is as follows:
(Dollars in thousands)Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Service cost$—  $—  
Interest cost91  98  
Expected Return on Plan Assets(109) (102) 
Amortization of Net Actuarial Loss105  68  
Amortization of Prior Service Cost—  —  
     Net Periodic Benefit Cost$87  $64  
Contributions Paid$349  $90  

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 $892 thousand and $783 thousand as of March 31, 2020 and December 31, 2019, respectively. Service cost was $109 thousand and $102 thousand for the three-month periods ended March 31, 2020 and 2019, respectively.

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Note 13 – Comprehensive Income

The following tables present the components of accumulated other comprehensive income (“AOCI”) three months ended March 31, 2020 and 2019:
(Dollars in thousands)Three Months Ended March 31, 2020Three Months Ended March 31, 2019 
Details about AOCI ComponentsAmount Reclassified from AOCIAmount Reclassified from AOCIAffected line item in the Statement where Net Income is presented
Available-for-sale securities 
     Unrealized holding gains (losses)$276  $(118) Gain (loss) on sale of securities
 276  (118) Total before tax
 (75) 32  Income tax expense
 201  (86) Net of tax
Defined benefit pension plan items 
     Amortization of net actuarial loss(105) (68) Salaries and benefits
 (105) (68) Total before tax
 28  18  Income tax expense
 (77) (50) Net of tax
Investment hedge
Carrying value adjustment1,793  458  Interest on investment securities - taxable
1,793  458  Total before tax
(484) (124) Income tax expense
1,309  334  Net of tax
Total reclassifications$1,433  $198   

(Dollars in thousands)Unrealized gains (losses) on available for-sale securitiesDefined benefit pension plan itemsInvestment HedgeTotal
Balance at December 31, 2019$2,942  $(4,295) $32  $(1,321) 
     Other comprehensive income (loss) before reclassification1,032  (516) —  516  
     Amounts reclassified from AOCI(201) 77  (1,309) (1,433) 
Net current period OCI831  (439) (1,309) (917) 
Balance at March 31, 2020$3,773  $(4,734) $(1,277) $(2,238) 
Balance at December 31, 2018(3,384) (3,422) —  (6,806) 
     Other comprehensive income (loss) before reclassification1,357  (242) —  1,115  
     Amounts reclassified from AOCI86  50  (334) (198) 
Net current period OCI1,443  (192) (334) 917  
Balance at March 31, 2019$(1,941) $(3,614) $(334) $(5,889) 

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
36

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 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.

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
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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.

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)Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Service charges on deposit accounts$450  $315  
Debit card and interchange income100  141  
Consulting income1,009  —  
Other261  113  
Noninterest income in scope of Topic 6061,820  569  
Noninterest income out of scope of Topic 6069,030  8,196  
Total noninterest income$10,850  $8,765  

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 and 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 earned and was reasonably assured to receive an estimated earn-out payment of $600 thousand related to the Asset Purchase Agreement with USI. 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 March 31, 2020 or December 31, 2019.

There was no net income from discontinued operations, net of tax, for the three months ended March 31, 2020 and 2019.
Note 16 – Subsequent Events

The Company evaluates subsequent events at the date of the consolidated balance sheet as well as conditions that arise after the balance sheet date but before the consolidated financial statements are issued. To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements other than those listed below.


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On April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value of approximately $28.2 million. The Bank also acquired three branch locations in Barboursville, Teays Valley, and Huntington, W.Va. for aggregate consideration of approximately $1.5 million. The Bank further acquired certain other real estate owned (“OREO”) for 47.5% of the book value of such OREO. The deposits assumed by the Bank had an aggregate book balance of approximately $140.0 million, cash and securities of $37.0 million and loans with a book value of $83.7 million. Net proceeds received from the FDIC for the transaction was $39.6 million. The Bank estimates a bargain purchase gain of approximately $6.0 million related to this transaction but is still in the process of finalizing the mark to market analysis of the portfolio. The applicable disclosures for this business combination have not been made as the fair value estimates and purchase price allocation are not yet complete as of the date of financial statement issuance.

On April 17, 2020, Paladin Fraud, LLC (“PF”), a newly formed West Virginia limited liability company and wholly owned subsidiary of MVB Bank, entered into an Asset Purchase Agreement with Paladin, LLC, (“Paladin”), James Houlihan and Jamon Whitehead (collectively "Paladin Group"). Pursuant to the Purchase Agreement, PF acquired substantially all of the assets and certain liabilities of Paladin and the purchase price of the transaction consisted of 19,278 unregistered shares of MVB common stock and an undisclosed amount of cash. The Paladin Group is a respected leader in the fraud prevention industry and has formed a specialty niche that aligns well with the MVB as a preferred bank for Fintech companies.

On April 24, 2020, the Company completed the previously announced sale of certain assets and liabilities of four branch locations to Summit. Summit assumed $188.1 million in deposits and acquired $36.8 million in loans, as well as cash, real property, personal property and other fixed assets. The Company will recognize a gain of approximately $10.0 million related to this transaction.
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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 March 31, 2020 and December 31, 2019 and the results of our operations for the three months ended March 31, 2020 and 2019. 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, 2019.

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, epidemics and pandemics, including the COVID-19 outbreak, 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 the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”), 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;
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•technological changes and our implementation of new technologies;
•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 FASB 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, 2019.

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

Three Months Ended March 31
(Dollars in thousands, except per share data)20202019
Earnings and Per Share Data:
     Net income$1,048  $3,192  
     Net income available to common shareholders$934  $3,071  
     Earnings per share - basic$0.08  $0.26  
     Earnings per share - diluted$0.08  $0.26  
     Cash dividends paid per common share$0.09  $0.035  
     Book value per common share$17.08  $14.90  
     Weighted average shares outstanding - basic11,942,767  11,607,543  
     Weighted average shares outstanding - diluted12,298,092  13,177,281  
Performance Ratios:
     Return on average assets 1
0.22 %0.73 %
     Return on average equity 1
1.95 %7.18 %
     Net interest margin 2
3.60 %3.45 %
     Efficiency ratio 3
91.25 %81.14 %
     Overhead ratio 1 4
5.06 %4.19 %
Asset Quality Data and Ratios:
     Charge-offs$1,756  $—  
     Recoveries$4  $3  
     Net loan charge-offs to total loans 1 5
0.50 %— %
     Allowance for loan losses$11,161  $11,242  
     Allowance for loan losses to total loans 6
0.80 %0.84 %
     Nonperforming loans$5,909  $7,075  
     Nonperforming loans to total loans0.42 %0.53 %
Capital Ratios:
     Equity to assets10.06 %10.11 %
     Bank Leverage ratio9.83 %10.33 %
     Bank Common equity Tier 1 capital ratio11.34 %12.55 %
     Bank Tier 1 risk-based capital ratio11.34 %12.55 %
     Bank Total risk-based capital ratio12.04 %13.37 %
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 Insurance was originally formed in 2000. In 2013, MVB Insurance became a direct subsidiary of the Company. MVB Insurance continues to operate its title insurance business, which is immaterial in terms of revenue. The Company reorganized MVB Insurance as a subsidiary of the Bank in 2016.

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.

On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, personal property, and other fixed assets associated with the branch locations. The Company closed this transaction on April 24, 2020, as previously discussed in Note 16, “Subsequent Events” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On March 2, 2020, the Bank and PMG (dba MVB Mortgage), entered into an Agreement by and among the Bank, PMG, Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the mortgage origination services businesses of PMG and Intercoastal.

Pursuant to the terms of the Agreement, on the closing date, Intercoastal will convert into a Virginia limited liability company and PMG will contribute substantially all of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of Intercoastal, representing 47% of the common interest of Intercoastal, as well as $7.5 million in preferred units (the “Transaction”). The completion of the Transaction is subject to certain regulatory approvals, conditions precedent and normal customary closing conditions. Subject to the satisfaction of such conditions, the Transaction is expected to close in mid-2020. In the Agreement, the Bank, MVB Mortgage, and Intercoastal have made customary representations, warranties, and covenants, including covenants to enter into ancillary agreements related to the Transaction and the operation of the business following the completion of the Transaction. MVB will recognize its ownership as a fair value equity investment and will no longer consolidate MVB Mortgage’s financial results.

On April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no
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deposit premium and to acquire the assets at a discount to book value. The Bank also acquired three branch locations in Barboursville, Teays Valley, and Huntington, W.Va.

On April 17, 2020, Paladin Fraud, LLC, a West Virginia limited liability company and indirect wholly owned subsidiary of MVB Financial Corporation, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, and upon the terms and conditions set forth therein, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, effective as of April 17, 2020.

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 relationships 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.

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 2019 filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.

At March 31, 2020, the Company had 459 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
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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 2019 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 2019 Annual Report on Form 10-K, describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Allowance for Loan Losses” section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

Results of Operations

Overview of the Statements of Income

For the three months ended March 31, 2020, the Company earned $1.0 million compared to $3.2 million in the first quarter of 2019. Net interest income increased by $2.2 million, noninterest income increased by $2.1 million, and noninterest expenses increased by $6.2 million.

The increase in net interest income was driven by an increase of $1.1 million in interest income and a decrease of $1.1 million in interest expense. The increase in interest income was due to average loan growth of $150.8 million with the yield on loans and loans held for sale decreasing by 23 basis points, primarily due to a decrease in commercial loan yield of 26 basis points and a decrease in real estate loan yield of 25 basis points. The decrease in interest expense of $1.1 million was due the cost of interest-bearing liabilities decreasing by 36 basis points, primarily due to a decrease in cost of funds on certificates of deposits of 25 basis points, which was offset by growth in average interest-bearing liabilities of $9.2 million. The decrease in interest expense was mainly driven by a $688 thousand decrease in interest expense on certificates of deposit, through short-term brokered certificates of deposit, and a decrease in the rates of certificates of deposits, and a $656 thousand decrease in interest expense on FHLB and other borrowings, due to a decrease in FHLB and other borrowings balances and a decrease in cost of funds on borrowings, which was offset by a $407 thousand increase in interest expense on money market checking, as a result of increasing balances in money market checking. Certificates of deposit decreased by $93.8 million while the cost of funds on certificates of deposit decreased by 25 basis points compared to the three months ended March 31, 2019. FHLB and other borrowings decreased by $59.3 million while the cost of funds on borrowings decreased by 86 basis points compared to the three months ended March 31, 2019. Money market checking increased by $134.6 million while the cost of funds on money market checking decreased by 7 basis points compared to the first quarter of 2019.

The increase in noninterest income was primarily the result of an increase in mortgage fee income of $4.5 million due to increased mortgage productivity, and an increase in compliance consulting income of $1.0 million, driven by the addition of Chartwell. This increase was offset by a decrease in the gain on derivatives of $4.0 million. The increase in noninterest expense was mainly driven by the increases in salaries and benefits of $4.4 million, 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 $528 thousand. This increase was mainly driven by travel for deposit acquisition and on-boarding costs, including due diligence, related to Fintech
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opportunities. Professional fees expense increased by $503 thousand. This increase was primarily due to increased legal fees related to the new entity Intercoastal Mortgage, LLC. The decrease in the gain on derivatives was the result of the volatility of rates due to the COVID-19 pandemic. Loan originations spiked during early March when Treasury yields were at an all-time low. Mortgage rates were "locked-in" near lows offering lower yields. The increased volume of originations resulted in unsettled mortgage positions to realize a large mark to market loss. However, the mark to market loss is also attributable to instability in the market for mortgage-backed securities and mortgage servicing rights.

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 $1.1 million and $300 thousand were made for the three months ended March 31, 2020 and 2019, respectively. The significant increase in loan loss provision is the result of the net impact of adjustments to the portfolio segmentation and changes in the level of recognized charge offs, historical loss rates, and qualitative adjustment factors.

Most notably, charge offs in the first quarter of 2020 totaled $1.8 million, while there were no charge offs in the first quarter of 2019. In 2020, there was a charge-off of a $1.8 million government lease financing loan stemming from the non-renewal of the underlying government contract unrelated to the COVID-19 pandemic. The historical loss rates were uniquely impacted in the first quarter of 2020 as a result of revisions to the portfolio segmentation, which were implemented to allow for the enhanced assessment of risk within the portfolio. More specifically, the most material enhancement included new commercial loan segments for purchased participation loans and government lease financing loans, as well as the division of the sole residential mortgage segment into a permanent mortgage segment and a construction mortgage segment. In general, this slightly reduced historical loss rates for the previously existing segments as it transitioned certain historical loan losses into the new segments. The most material impact of this enhancement was the impact of the $1.8 million charge off noted previously, which was a single loan to a borrower within the new government lease financing segment. This single charge off increased the historical loss rate by 67 basis points, or 145%, specific to this segment.

The qualitative adjustment factors were also uniquely impacted in the first quarter of 2020, primarily as a result of the COVID-19 pandemic. Given that the virus had just begun to have an effect on the economy, the government, and the way we live, in late March, the potential impacts were only beginning to reveal themselves as of the quarter ended March 31, 2020. As a result, quantifiable evidence of the impacts to our loan portfolios were not yet known in terms of potential problem loans and deterioration in collateral values. Meanwhile, as of quarter-end, management had not made any significant changes to lending strategies that would impact the nature and volume of our loan portfolios, or the concentrations of credit risk within those portfolios. However, the unprecedented initiatives of the Federal Government to provide support to the economy through new loan programs, has simultaneously served to temporarily mitigate some of the unknown impacts to our economy and our borrowers, while also adding some degree of increased risk to lending policies and procedures as a result of the pace and manner in which these programs have been developed and made available to the public. Furthermore, the impacts to the economic and business conditions in which we operate, and the strength of consumer sentiment were considered to have been materially impacted as of quarter-end, even if the full extent of such impacts were not yet known.

Total loan volume increased $22.0 million in the first quarter of 2020 versus a $36.9 million increase in the first quarter of 2019. The commercial loan portfolio increased by $30.7 million for the first quarter of 2020, in comparison to $21.0 million in the first quarter of 2019, while the residential mortgage loan portfolio decreased by $10.1 million in the first quarter of 2020, while increasing by $15.8 million in the first quarter of 2019. In addition, provision was impacted by a $42 thousand increase in the specific loan loss allocations in the first quarter of 2020, relative to a $80 thousand increase in the first quarter of 2019.

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.

Due to the ongoing COVID-19 pandemic, there has been a significant amount of downward movement in the fed funds rate
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during the period. To begin the period, the fed funds rate was set at 1.50-1.75 due to the latest downward shift during the fourth quarter of 2019. With the economic volatility and increases in unemployment during March 2020, the Federal Reserve shifted the fed funds rate down to 0.00-0.25. Given all of these changes to the market rates, the Company has experienced increased pressure on net interest income.

For the three months ended March 31, 2020 versus 2019, the Company was able to grow average loans and loans held for sale balances by $150.8 million to $1.5 billion. Average investment securities increased $5.4 million to $237.5 million. Average interest-bearing liabilities increased by $9.2 million, primarily the result of a $134.6 million increase in average money market checking and a $50.5 million increase in average NOW, offset by a $93.8 million decrease in average certificates of deposit balances, a $59.3 million decrease in average FHLB and other borrowings, and a $13.4 million decrease in average subordinated debt. An increase in the Company’s average non-interest balances of $117.4 million helped to grow a 33-basis point favorable spread on net interest margin in 2020 compared to a 30-basis point spread in 2019.

The net interest margin for the three months ended March 31, 2020 and 2019 was 3.60% and 3.45%, respectively. The 15-basis point increase in the net interest margin for the three months ended March 31, 2020 was mainly the result of the cost of interest-bearing liabilities decreasing by 36 basis points. The cost of interest-bearing liabilities decrease was mainly the result of an 86-basis point decrease in FHLB and other borrowings and a 19-basis point decrease in interest-bearing deposits. More specifically, the decrease in interest-bearing deposits was as follows: a 25-basis point decrease in certificates of deposit, a 7-basis point decrease in money market checking, a 4-basis point decrease in NOW, with a 9-basis point increase in IRAs. This decrease in cost of interest-bearing liabilities was offset by a 24-basis point decrease in yield on average earning assets for the three months ended March 31, 2020 versus 2019, primarily the result of a 23-basis point decrease in yield on loans and loans held for sale and a 39-basis point decrease in yield on investment securities. More specifically, the decrease in yield on loans and loans held for sale was driven by a decrease in the yield on commercial loans of 26 basis points and a 25-basis point decrease in yield on real estate loans.

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. During periods of decreasing rates, yields will continue to decline. The Company has some protection from this as loans with balances of $630.3 million have rate floors. Of these, $624.7 million have rate floors above 1 percent, $605.5 million have rate floors above 2 percent, $601.7 million have rate floors above 3 percent, $487.8 million have rate floors above 4 percent, $250.4 million have rate floors above 5 percent, and $47.2 million have rate floors above 6 percent.
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MVB Financial Corp. and Subsidiaries
Average Balances and Interest Rates
(Unaudited) (Dollars in thousands)
Three Months Ended March 31, 2020Three Months Ended March 31, 2019
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$13,643  $49  1.44 %$7,546  $49  2.63 %
CDs with other banks12,549  62  1.98  14,778  73  2.00  
Investment securities:
     Taxable127,327  666  2.10  139,692  879  2.55  
     Tax-exempt110,188  877  3.19  92,417  837  3.67  
Loans and loans held for sale: 1
     Commercial1,089,212  13,863  5.11  951,836  12,594  5.37  
     Tax exempt11,760  106  3.62  14,251  123  3.50  
     Real estate429,720  4,953  4.62  411,639  4,941  4.87  
     Consumer7,473  123  6.60  9,654  127  5.34  
Total loans1,538,165  19,045  4.97  1,387,380  17,785  5.20  
Total earning assets1,801,872  20,699  4.61  1,641,813  19,623  4.85  
Less: Allowance for loan losses(11,366) (11,071) 
Cash and due from banks20,766  16,088  
Other assets136,744  112,301  
     Total assets$1,948,016  $1,759,131  
Liabilities
Deposits:
     NOW$407,462  $798  0.79 %$357,005  $729  0.83 %
     Money market checking432,175  1,451  1.35  297,607  1,044  1.42  
     Savings36,867  1  0.01  40,235  1  0.01  
     IRAs16,573  78  1.89  17,826  79  1.80  
     CDs334,810  1,582  1.90  428,610  2,270  2.15  
Repurchase agreements and federal funds sold9,520  10  0.42  14,206  14  0.40  
FHLB and other borrowings115,930  573  1.98  175,222  1,229  2.84  
Subordinated debt4,124  35  3.40  17,524  285  6.60  
     Total interest-bearing liabilities1,357,461  4,528  1.34  1,348,235  5,651  1.70  
Noninterest bearing demand deposits331,962  214,541  
Other liabilities43,463  18,450  
     Total liabilities1,732,886  1,581,226  
Stockholders’ equity
Preferred stock7,334  7,834  
Common stock11,997  11,659  
Paid-in capital122,663  116,925  
Treasury stock(1,135) (1,084) 
Retained earnings74,401  49,161  
Accumulated other comprehensive (loss)(130) (6,590) 
     Total stockholders’ equity215,130  177,905  
     Total liabilities and stockholders’ equity$1,948,016  $1,759,131  
Net interest spread3.27  3.15  
Net interest income-margin$16,171  3.60 %$13,972  3.45 %
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 March 31, 2020, noninterest income totaled $10.8 million compared to $8.8 million for the same time period in 2019. The $2.1 million increase in noninterest income was primarily the result of an increase in mortgage fee income of $4.5 million, an increase in compliance consulting income of $1.0 million, an increase in gain on sale of securities of $394 thousand, and an increase in commercial swap fee income of $240 thousand. These increases were partially offset by a decrease in the gain on derivatives of $4.0 million and a decrease in income on bank owned life insurance of $302 thousand.

The increase in mortgage fee income of $4.5 million is driven by an increase of $171.7 million in mortgage loans sold for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in compliance consulting income of $1.0 million is due to the addition of the Chartwell team during 2019. The increase in commercial swap fee income of $240 thousand is due to swap volume of $12.3 million for the first quarter of 2020 compared to $3.0 million for the first quarter of 2019. The increase of $153 thousand in other operating income was primarily due to an increase of $60 thousand in dividends on FHLB stock and an increase of $32 thousand in wire transfer fees. The decrease in the gain on derivatives of $4.0 million was largely the result of the volatility of rates due to the COVID-19 pandemic. Loan originations spiked during early March when Treasury yields were at an all-time low. Mortgage rates were "locked-in" near lows offering lower yields. The increased volume of commitments to originate loans at locked-in rates resulted in unsettled mortgage positions to realize a large mark to market loss. However, some of the mark to market loss is also attributable to instability in the market for mortgage-backed securities and mortgage servicing rights.
Noninterest Expense

The Company had 459 full-time equivalent personnel at March 31, 2020, as noted, compared to 389 full-time equivalent personnel as of March 31, 2019. 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 91.25% for the first quarter of 2020 compared to 81.14% for the first quarter of 2019. This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus noninterest income. The increased efficiency ratio for the three months ended March 31, 2020 is the result of the growth in noninterest expense outpacing the growth in net interest income and noninterest income.

For the three months ended March 31, 2020, noninterest expense totaled $24.7 million compared to $18.4 million for the same time period in 2019. The $6.2 million increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased by $4.4 million. The increase was primarily the result of increased mortgage production, the build-out of other Company administration, the build-out of the Fintech team, increased incentive and stock-based compensation, and the additional team members acquired as a result of the Chartwell acquisition during the third quarter of 2019.

Travel, entertainment, dues, and subscriptions expense increased by $528 thousand. This increase was mainly driven by travel for deposit acquisition and on-boarding costs, including due diligence, related to Fintech opportunities. Travel, entertainment, dues, and subscriptions for the compliance consulting team added during 2019 have also driven the increase.

Professional fees expense increased by $503 thousand. This increase was primarily due to increased legal fees related to the new entity Intercoastal Mortgage, LLC and increases due to special projects, Fintech products, and technology development.

Other operating expense increased by $331 thousand. This increase was largely due to amortization of intangibles related to the 2019 Chartwell acquisition.

Data processing and communications increased by $175 thousand. The increase was primarily driven by data processing related to the Purchase and Assumption Agreement with Summit Community Bank that the Company expects to close in in the second
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quarter of 2020.

Return on Average Assets (Annualized)

The Company’s return on average assets was 0.22% for the first quarter of 2020, compared to 0.73% for the first quarter of 2019. The decreased return for the first quarter of 2020 is a direct result of a $2.1 million decrease in earnings, while average total assets increased by $188.9 million, primarily the result of a $150.8 million increase in average total loans and loans held for sale and a $24.4 million increase in average other assets.

Return on Average Equity (Annualized)

The Company’s return on average stockholders’ equity was 1.95% for the first quarter of 2020, compared to 7.18% for the first quarter of 2019. The decreased return for the first quarter of 2020 is a direct result of a $2.1 million decrease in earnings, while average stockholders’ equity increased by $37.2 million. The increase in average stockholders’ equity was primarily due to a $25.2 million increase in retained earnings, a $6.5 million decrease in accumulated other comprehensive loss and a $5.7 million increase in paid-in capital.

Overview of the Consolidated Balance Sheets

The greatest balance changes since December 31, 2019 were as follows: total assets increased by $155.6 million, to $2.1 billion, loans increased $22.0 million, to $1.4 billion, available-for-sale investment securities decreased $12.7 million, to $223.1 million, deposits increased $333.2 million, to $1.6 billion, borrowings decreased $192.1 million, to $30.8 million, and stockholders’ equity decreased by $783 thousand, to $211.2 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $88.9 million at March 31, 2020, compared to $28.0 million at December 31, 2019.

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.

With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management believes liquidity needs could be greater during this volatile time within the industry and markets. Based upon this volatility, the Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to maintain liquidity.

Investment Securities

Investment securities totaled $242.1 million at March 31, 2020, compared to $254.3 million at December 31, 2019. As of March 31, 2020, the investment portfolio is comprised of the following mix of securities:

•48.2% – Municipal securities
•15.4% – U.S. Agency securities
•23.7% – U.S. Sponsored Mortgage-backed securities
•4.9% – Other securities
•7.8% – 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.

Due to the COVID-19 pandemic, there has been increased volatility within the investment market. Given the balance mix of the
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Company to begin the period, management was able to take advantage of opportunities in selling available-for-sale investment securities for gains and purchased securities at favorable pricing levels.

Loans

The Company’s loan portfolio totaled $1.4 billion as of March 31, 2020 and totaled $1.4 billion as of December 31, 2019. The Bank’s lending is primarily focused in the Marion, Harrison, Monongalia, and Kanawha counties of West Virginia, and Fairfax and Loudoun counties of Virginia, with a secondary focus on the adjacent counties. Its extended market is in the adjacent counties. The portfolio consists principally of commercial lending, 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 March 31, 2020 and December 31, 2019, $1.1 billion, or 78.4% and $1.1 billion, or 77.4%, 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 $11.2 million or 0.80% of total loans at March 31, 2020 compared to $11.8 million or 0.86% of total loans at December 31, 2019. The decrease in this ratio was the direct result of the net impact of adjustments to the portfolio segmentation, changes in the level of recognized charge offs, changes in historical loss rates, changes in outstanding loan portfolios, and changes in the level of specific loan loss allocations. 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 $1.6 billion at March 31, 2020.

Noninterest-bearing deposits remain a core funding source for the Bank and thus, the Company. At March 31, 2020, noninterest-bearing balances totaled $387.5 million compared to $278.5 million at December 31, 2019. Of the $387.5 million, noninterest-bearing balances of $156.2 million are related to Fintech opportunities and noninterest-bearing balances of $96.0 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 March 31, 2020 compared to $1.0 billion at December 31, 2019.

At March 31, 2020, the Bank had brokered deposits of $181.2 million and CDs with other banks of $125.7 million. At December 31, 2019, brokered deposits totaled $63.9 million and CDs with other banks totaled $44.3 million. Due to the liquidity stress within the industry being caused by the COVID-19 pandemic, management has focused on creating liquidity in anticipation of loan deferrals and other potential cash flow disruptions.

Average interest-bearing deposits totaled $1.2 billion during the first quarter of 2020 compared to $1.1 billion during the first quarter of 2019, an increase of $86.6 million. Average noninterest bearing deposits totaled $332.0 million during the first quarter of 2020 compared to $214.5 million during the first quarter of 2019, an increase of $117.4 million. Management will continue to emphasize deposit growth opportunities from the network of current customers and Fintech partners. The Company and Bank
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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 March 31, 2020, repurchase agreements totaled $9.3 million compared to $10.2 million at December 31, 2019. In addition to the aforementioned funds alternatives, the Bank has access to more than $295.6 million through additional advances from the FHLB of Pittsburgh and the ability to readily sell jumbo certificates of deposits to other banks as well as brokered deposit markets.

Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand, and deposit withdrawals, without incurring a sustained negative impact on net interest income. It is MVB’s policy to manage liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions.

The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans, and income from loans and investment securities. During the three months ended March 31, 2020, cash provided by financing activities totaled $138.4 million, while inflows from investing activity totaled $1.1 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 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.

With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management believes liquidity needs could be greater during this volatile time within the industry and markets. Based upon this volatility, the Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to maintain liquidity.

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. Given the recent outbreak of COVID-19, the economy has been impacted both nationally and internationally. Due to the nature of this situation, it is unclear what the duration and severity of the outbreak will be. This impact has been felt within the primary market area as well as unemployment rates have begun to escalate. Unemployment in the United States was 4.5% and 3.9% in March 2020 and 2019, respectively.

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The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:
February 2020February 2019
Berkeley County, WV3.3 %4.4 %
Harrison County, WV5.1  5.4  
Jefferson County, WV2.8  3.6  
Marion County, WV5.1  6.1  
Monongalia County, WV3.4  4.4  
Kanawha County, WV4.8  5.7  
Fairfax County, VA2.1  2.6  
Loudoun County, VA2.1  2.6  

Capital/Stockholders' Equity

For the three months ended March 31, 2020, stockholders’ equity decreased approximately $783 thousand to $211.2 million. This decrease consists of year-to-date net income of $1.0 million, and stock-based compensation of $498 thousand, offset by dividends paid totaling $1.2 million and an increase in other comprehensive loss of $917 thousand. As stockholders’ equity decreased, the equity to assets ratio decreased 0.84% to 10.06%. The Company paid dividends to common shareholders of $1.1 million in the three months ended March 31, 2020 and $408 thousand in the three months ended March 31, 2019, and earned $1.0 million in the three months ended March 31, 2020 versus $3.2 million in the three months ended March 31, 2019, resulting in the dividend payout ratio increasing from 13.29% in the three months ended March 31, 2019 to 115.20% in the three months ended March 31, 2020.

At March 31, 2020, accumulated other comprehensive loss totaled $2.2 million, an increase in the loss of $917 thousand from December 31, 2019. Total securities available-for-sale in an unrealized loss position decreased by $505 thousand to $432 thousand at March 31, 2020. 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 67,377 shares, up 16,300 shares from common stock repurchased during March 2020.

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 12.84% at December 31, 2019 to 12.04% at March 31, 2020. The decrease in this ratio was largely due to an increase of risk-weighted assets of $93.6 million and a $1.2 million decrease in total capital.

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
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•4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio”).

The Capital Rules also include a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 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 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. In July 2019, the bank regulatory agencies finalized the rule which applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest. The rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. Generally, the final rule is effective as of April 1, 2020, however banking organizations were permitted to use this simpler regulatory capital requirements as of January 1, 2020.

In June 2016, the FASB 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 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 that 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 2019, the proposed delay would be applicable. On November 15, 2019, the FASB issued an update which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023.

Notwithstanding the foregoing, 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 (“CBLR”) (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 CBLR will automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualify for the CBLR test based on the institution’s risk profile. In November 2019, the federal bank regulators issued a final rule on the CBLR, setting the minimum required CBLR at 9%. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulators’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the FDIA. As required by Section 4012 of the CARES Act, the federal banking agencies temporarily lowered the CBLR to 8% on April 6, 2020. These interim final rules set the CBLR at 8% through the end of 2020, 8.5% for 2021, and then re-establish it at 9% for 2022. The final rule was effective on January 1, 2020 and the CBLR framework will be available for banks to use in their March 31, 2020 Call Report. The Bank did not elect to apply the CBLR framework in the March 31, 2020 Call Report.
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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 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 eliminated these requirements for banks with less than $10.0 billion in assets who elect to follow the CBLR.

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.

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At March 31, 2020, 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, 2019 Annual Report on Form 10-K.

Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

Concentration of Credit Risk

The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers throughout the Marion, Harrison, Monongalia, and Kanawha County areas of West Virginia, as well as the Northern Virginia area and adjacent counties. Collateral for loans is primarily residential and commercial real estate, personal property, and business equipment. The Company evaluates the credit worthiness of each of its customers on a case-by-case basis, and the amount of collateral it obtains is based upon management’s credit evaluation.

Regulatory

The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average balance maintained in accordance with such requirements was $0 on March 31, 2020 and December 31, 2019. 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
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into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.

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

Our operations are subject to many risks that could adversely affect our future financial condition and performance, including the market risk factors that are described in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019. Other than the information below and as discussed throughout Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q, there have been no material changes in our market risk factors from those disclosed.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

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.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. One factor that has historically had a strong relationship with inflation is the unemployment rate. This relationship is known as the Phillips Curve. The Phillips Curve presumes that as unemployment increases, inflation decreases. The intuition behind the Phillips Curve is that increased unemployment results in less consumer spending. A decline in consumer spending represents a decrease in demand in the market for goods and services and ultimately a decline in the overall level of prices for goods and services. Management expects risks to inflation to be to the downside rather than upside (the general level of prices is more likely to decrease than increase).

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.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, Management expects that net interest income will decline. As the outlook for the
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COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

Management expects that some customers will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many customers may be eligible to defer loan payments to a later date. The Company is actively participating in the Paycheck Protection Program, evaluating other programs available to assist our clients and providing consumer deferrals consistent with GSE guidelines. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

There has been considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who may be temporarily unable to work. Management expects that demand for PPP loans will remain strong throughout the duration of the lockdown brought on by the COVID-19 pandemic. Some types of businesses, such as sole proprietorships, have only recently been able to apply for PPP funding. The original tranche of PPP funding of $349 billion ran out 13 days after the program's implementation, but the U.S. Government plans to provide additional funding.

Additionally, management has taken steps to generate liquidity in anticipation of temporary loan payment deferrals or other loan payment disruptions which are likely to materialize as a result of decreased economic activity brought on by the COVID-19 pandemic. Management has sold certain bond portfolio holdings and issued brokered deposits in order to generate cash. Management also has discretion to take further gains by selling additional available-for-sale investments and is well within policy limits for non-core funding sources.

Management expects core deposits to increase in the coming months. Many consumers are working from home or temporarily unemployed but still receiving income via unemployment or PPP. Additionally, many Americans are receiving their tax refunds for the 2019 filing year and up to $1,200 per person in stimulus payments from the CARES Act. Since consumers have fewer ways to spend their money during the lockdown brought on by the COVID-19 pandemic, management expects that deposits will remain relatively sticky until the pandemic lockdown ends.

On April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation, as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Sensitivity Management

The Company uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twenty-four-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities as of December 31, 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 December 31, 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 0.3%. An immediate 200-basis point increase in interest rates would result in an increase in net interest income by 1.3%. A 100-basis point decrease in interest rates would result in a decrease in net interest income of 6.9%. 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
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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.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown which will occur as a result of the COVID-19 pandemic is unknown. Financial markets have adjusted dramatically to the expectation of reduced economic activity. The financial market benchmark most relevant to the Company’s current and future profitability is the U.S. Government Treasury yield curve. The U.S. Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits, and other fixed income yield curves. The U.S. Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the U.S. Government Treasury curve will experience some degree of an upward shift over time.

Management expects that some customers will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many customers may be eligible to defer loan payments to a later date. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

Item 4 – Controls and Procedures

The Company, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of March 31, 2020, of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s President and Chief Executive Officer, along with the Company’s Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020.

There have been no material changes in the Company’s internal control over financial reporting during the first quarter of 2020 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, including the risk factors that are described in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019. Other than the information below and as discussed throughout Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q, there have been no material changes in our risk factors from those disclosed.

The Company may face risks related to the recent outbreak of COVID-19, which has been declared a “pandemic” by the World Health Organization.

The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its customers may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially impact the Company’s customers, providers, and third parties. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

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

(a) Not applicable.

(b) Not applicable.

(c) Issuer purchases of Registered Equity Securities:

On August 12, 2019, the Board of Directors of the Company announced the approval of a stock repurchase program. Under the program, the Company is authorized to repurchase up to $5.0 million of its outstanding shares of common stock over the next 12 months or until the purchase is fully absorbed, whichever date comes first on the open market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any specified number of shares of its common stock, and it may be discontinued, suspended, or restarted at any time at the Company's discretion.

In March 2020, the Company repurchased 16,300 shares of its outstanding common stock at an average price of $16.00 per share.

The following table reflects share repurchase activity during the three months ended March 31, 2020:

PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs
March 1 - March 31, 202016,300  $16.00  16,300  $4,739,177  
16,300  16,300  

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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:April 28, 2020By:/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
Date:April 28, 2020By:/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)