Trusted Partners on the Financial
Frontier — Committed to Your Success
Our True Financial North Star
Where we are today in the banking industry is no different. You
can do the right thing for too long. Financial institutions that
focus solely on traditional banking will likely become extinct.
From online banking to mobile apps and same-day payments
to cryptocurrency, fintech is causing major industry disruption.
MVB is becoming distinct. We are embracing disruption! It’s an
exciting time. You can feel the energy building. 2018 was the
best year in our history for bank earnings. More opportunities
exist now than I have ever seen in my 30 years of banking. MVB
is not going back to the old way. We have become leaders, not
fast followers.
MVB has focused on our true financial north star, which
is earnings per share (EPS) driven by three major factors:
net interest margin (NIM), net interest expense (NIE), and
noninterest income (NII).
Regarding NIE, our operating expenses were well-contained for
the year, up just over 4% from the prior year period. We are
continuing a long track record of good risk controls and
pristine asset quality. The mortgage industry creates some
volatility, but we are making progress in adding more consistent
streams of NII.
Our Higher Purpose
We know our higher purpose is more than solely financial – our
corporate culture also drives our future success. To this end,
we launched a culture initiative with our partner The Pacific
Institute in the fall of 2018 to guide our transformation from
the inside out, touching Teammates’ hearts and minds. We
rolled out our new purpose: “Trusted Partners on the Financial
Frontier – Committed to Your Success.” Our new corporate
values are love, trust, commitment, adaptability, and teamwork.
As a company, we are purposefully adopting a “Yes, if ” instead
of a “No, because” mindset, which is that of an energized,
innovative start-up business.
Scaling Up
Mindset matters because the banking industry is an arms race
right now. MVB is scaling up. We proved that our MVB 3.0
strategy, with a focus on “blue ocean” opportunities centered on
our fintech vertical, is making a real impact on our bottom line.
We are scaling up our fintech operations to take full advantage
of our unique position to become the preferred bank of fintech
giving us a competitive edge over slower adopters.
Team MVB is working to ensure our traditional banking
operations are lean and efficient. MVB is positioned for
continued success in 2019 with our commercial lending and
retail banking modernization. As MVB’s footprint expands
through our fintech vertical adding clients coast to coast, we
also celebrated the grand openings of two new banking centers
in Northern Virginia in 2018. Our five FTE call center manages
17 personal touch Interactive Teller Machines (ITMs) at seven
banking centers to provide extended hours of operation for
our clients.
Technology has always been a disruptive force that pushes
our world into new frontiers. In the transportation industry,
airplanes outpaced travel by train. In New York City, rideshare
services like Uber are quickly replacing taxis. You can do the
right thing for too long. When you become comfortable with the
status quo and do not modernize with the technology-driven
transformation around you, you can become extinct. Survival
and thriving mean finding ways to embrace disruption and
transform from the inside out.
Distinct Not Extinct
Part of the vaudeville circuit, the Robinson Grand Theater
opened in 1913 in Clarksburg, West Virginia. By the late 1920s,
motion pictures had become center stage, and the Robinson
Grand operated as a movie theater and a community stage for
local productions through the 1980s. Growing up in Clarksburg,
I have many fond memories of watching movies there. As large
movie multiplexes grew in popularity, usage of the Robinson
Grand declined until its doors closed, and the building sat
vacant for a decade. The Robinson Grand did not modernize
to keep pace with technology. This is an example of doing the
right thing for too long—however, I’m glad to say this story has
a happy ending.
In 2014 the City of Clarksburg acquired the building and
initiated a $15 million project to renovate and restore the
Robinson Grand Performing Arts Center. MVB helped the City
of Clarksburg secure New Market and Historical Tax Credits
that provided a net gain of more than $6.5 million for the project.
MVB assisted with bond anticipation notes and provided a loan
of $15 million. This shows MVB’s entrepreneurial spirit and its
commitment to lending locally. As a trusted partner committed
to this project’s success, MVB also donated $75,000 toward the
historic landmark’s restoration. The grand opening of the jewel of
Clarksburg’s Central Business District attracted a sold-out crowd
for Jay Leno in October 2018. The Robinson Grand became
distinct instead of extinct and continues to do so profitably,
exceeding expectations.
MVB Bank hosted a Grand Opening Celebration for its new Northern Virginia
regional corporate suite and banking center near Reston Town Center on October
15, 2018. MVB’s new McLean banking center was celebrated on November 13, 2018.
MVB Mortgage continues to be profitable, while may others
in this industry are seeing losses. Mortgage leadership has
been diligent in reducing costs and leveraging experienced,
quality talent. Mortgage brings additional client business to
the bank through productive referrals.
Attitude of Gratitude
Through this transformative journey on the financial frontier,
it’s our values that make the difference. As we build our
culture across the company, the buzz continues to build that
MVB is a great place to work, a place where you can make a
difference. We are grateful to invest our time and resources to
make our communities better places to live.
I am thankful for our Board of Directors and Teammates
who share their time and remain committed to making
MVB the best it can be with a focus on a solid return to
our shareholders.
Thank you for believing in our purpose and allowing MVB to
be your trusted partner. As always, please feel free to contact
me directly with comments or questions, including ways we
can assist you or someone you know with your banking or
mortgage needs.
I N M E M O R I A M :
Stephen R. Brooks
Chairman, Family Man, and Friend
Stephen R. Brooks, Chairman of the MVB Financial Corp.
Board of Directors, passed away August 9, 2018. This was a
great loss to our MVB family and to many of us who knew
Steve personally for many years.
Steve was a man who loved his family and adored his wife,
Kathy. Steve had served as Chairman of the MVB Financial
Corp. Board of Directors since December 19, 2013, and was
one of MVB’s Founding Directors in 1999.
“I am grateful for Steve’s dedication to
MVB over the years and his leadership
in MVB’s growth journey.”
Larry F. Mazza, CEO and President
Steve also served as an attorney for Flaherty Sensabaugh
Bonasso. Not only was he a great attorney and businessman,
but he also was an extraordinary person who served his
community. He will be missed as a colleague, friend, and
member of the MVB family.
03
Only the best,
Larry F. Mazza, President & CEO,
MVB Financial Corp. and MVB Bank
On March 28, 2018, Steve and Kathy Brooks celebrated The Nasdaq Closing
Bell Ringing with the MVB Board of Directors and Senior Leadership Team
at The Nasdaq MarketSite Studio in Times Square. MVB started trading on
The Nasdaq in December 2017.
04
RAISING
SPIRITS
White Sulphur Springs’ new
cooperage will provide economic
opportunity after 2016 floods
Construction has officially begun on a whiskey barrel
manufacturing facility—a cooperage—in White Sulphur
Springs, West Virginia. But the $30 million project seeks
to do more than merely make barrels. After the devastating
floods that ravaged the area in June 2016 and claimed over
20 lives, the West Virginia Great Barrel Co. and MVB hope
the cooperage will act as an economic driver to a region
still in recovery.
“A lot of houses that were destroyed belonged to families
who’d lived in them for three or four generations,” said
Tom Crabtree, an architect who helped kickstart the
project. “Their homes were simply washed away, and they
had nothing left.”
White Sulphur Springs is home to The Greenbrier, a
235-year-old luxury resort and second home to numerous
affluent visitors from across the country. Crabtree, the
investors, and their network raised $3.5 million in the
wake of the flood to rebuild the flooded area and assist
displaced residents, ultimately creating a unique housing
development known as Hope Village.
“Then, that philanthropic network of people sat back and
said, ‘Now what are these folks going to do for income?’”
Crabtree said.
One member of the group had experience in the distillery
business and realized that there is a dramatic shortage
of whiskey barrels within the whiskey industry. To
distill bourbon whiskey, each barrel must be made from
American White Oak and can only be used once.
Crabtree and other Greenbrier frequenters formed a
development team and used their collective networks to raise
more than $13 million from investors, while MVB contributed
a total of $12.3 million to a new project—the West Virginia
Great Barrel Company. MVB provided a bridge loan of $6
million that will be replaced with an Economic Development
Authority loan, in addition to a $6.3 million equipment loan
to the barrel company.
Already, the construction of the facility has created 80 jobs
lasting through spring 2019, with production of the barrels
set to begin later in the year. At the onset, the cooperage will
hire around 50 people and will produce over 180,000 barrels
per year, but in the future, it plans to expand its staff with an
eye on doubling its production rate.
The cooperage is a unique project for a bank of MVB’s size
and a notable win for the bank’s Community Development
Corporation. MVB has often played an ancillary role in
similar projects, but with the creation of the CDC, it can now
participate more directly in even more innovative lending
and investing opportunities and use its expertise in leveraging
New Market Tax Credits.
“This is exactly the type of project MVB
wants to be involved with—a project where
we, as a bank, can use our professional
expertise to empower people to do good on
a grassroots level.”
Herman DeProspero, MVB Bank North Market President and
MVB CDC President
BUILDING THE
NEXT GENERATION
MVB Bank commercial loan processing administrator
Leota Shillingburg presents Gerrardstown Elementary
School representatives Jennifer Wolf, Cheryl Brooke, and
Melissa Hollen with a Berkeley County School Business
Partnership grant award. Each year, MVB Bank pays the
annual dues for four partner schools, helping provide local
students with project funding and scholarship awards.
05
Historic funding project mirrors
Clarksburg’s citywide revitalization
For about a century, the Robinson Grand Theater thrived in the
heart of Clarksburg’s downtown and served as the epicenter
of the North Central West Virginia city’s arts, entertainment,
and performance scene. Over time, usage waned as necessary
renovations went undone, and the theater closed its doors
in 2004.
A decade later, the City of Clarksburg acquired the vacant
facility and began laying the groundwork to resurrect the
storied theater. City leaders and residents hoped the Robinson
Grand would once again become a landmark destination
property within the Central Business District. But first, there
was the question of financing—a huge, complex undertaking
only made possible through a partnership with MVB Bank.
“MVB Bank assisted and supported the overall project
in so many ways,” said Clarksburg City Manager Martin
Howe. “MVB Bank’s management team vetted the project
thoroughly before submitting the financing terms. The
leadership of Larry Mazza and Herman DeProspero was
very crucial, as they could see the vision the city had on this
project and could recognize the minimal risk and exposure
of this complex financial package that was being brought to
them to review.”
MVB support included a sizable contribution to the new
Robinson Grand Performing Arts Center’s $2 million capital
campaign—a testimonial to MVB’s strong, healthy business
relationship with the City of Clarksburg. The contribution
is highlighted on both the Robinson Grand’s donor wall
and in the naming rights to the theater’s renovated North
Concessions Area.
“The City of Clarksburg has been a long-time customer of
MVB Bank,” said DeProspero, MVB North Market President.
“This revitalization effort has provided a location for
community events, cultural events, opportunities for the
arts, and arts education.”
“MVB has played an instrumental
role in our restoration and renovation.
Not only have they been vital partners
in securing financing, they have also
contributed very graciously to our
capital campaign.”
Ryan Tolley, Robinson Grand PAC Executive Director
“We view this sponsorship as not just a contribution to
the theater,” he continued, “but also a contribution to the
regional community and all the benefits it will allow us to
provide for years to come.”
A new heyday has arrived in Clarksburg. The theater is
packed, with guests coming from around the region to
enjoy one-of-a-kind experiences, including local theater
and performances from celebrated international recording
artists. The City has also committed to providing school-
based educational programs for its residents—exposing
them to artistic and cultural experiences that leave a
lasting impression.
“The collective sum is almost overwhelming,” Tolley said.
“Historic preservation, economic development, cultural
events, arts and entertainment, community theater, and
the ability to assist various non-profits and community
initiatives are just a few benefits that we can offer.
“MVB keenly recognizes these opportunities and sees how
they align with the bank’s goals,” he continued. “We are
so greatly appreciative of MVB’s partnership and support
of this project.”
HELPING THE HOMELESS
Home4Good partnership nets $291,000 for local agencies
06
“MVB was glad to partner with organizations serving those in
need and preventing homelessness throughout West Virginia,
but we had a special focus on Kanawha County and Charleston,”
said Laura Rye, Community Reinvestment Act Officer for
MVB. “Working with Traci Strickland at the Kanawha Valley
Collective, we identified numerous projects that met the targeted
purpose of Home4Good.”
“It’s our great pleasure to be connected
with organizations that do such good work
to provide all people with the most basic
elements of life with dignity and grace.”
Laura Rye, Community Reinvestment Act Officer
Home4Good helps those who are homeless or at risk of
homelessness by financially supporting local homeless service
organizations focused on prevention and innovative solutions.
Visit fhlb-pgh.com/home4good for more information.
In the fight against homelessness, there is a desperate need
for funding that can be used creatively—without red tape.
To meet that need, Federal Home Loan Bank of Pittsburgh
(FHLBank Pittsburgh), in partnership with the West Virginia
Housing Development Fund, awarded six Home4Good grants
in December 2018 to agencies fighting homelessness in Kanawha
County, West Virginia—all made possible through partnerships
with MVB Bank and another FHLBank member institution.
THE COVENANT HOUSE
A day shelter awarded $36,000 for homelessness prevention.
THE KANAWHA VALLEY COLLECTIVE
A grassroots Continuum of Care (COC) agency, was awarded
$60,000 for service expansion, HMIS oversight and flex funds,
and $13,881 for Continuum of Care administration.
PRESTERA CENTER
Serves over 20,000 West Virginians by providing behavioral
health and addiction recovery, was awarded $50,000 to put
toward its street outreach efforts.
REA OF HOPE
Received $65,000 for its fellowship home to help homeless
women in early recovery.
THE ROARK-SULLIVAN LIFEWAY CENTER
Awarded $30,000 to provide transitional living services for
homeless veterans.
YWCA SOJOURNER’S SHELTER FOR HOMELESS
WOMEN AND FAMILIES
Awarded $36,621 to continue offering 24/7/365 shelter and direct
support services to those in need.
From left to right are Eric Voiers of the Roark-Sullivan Lifeway Center, Margaret
O’Neal of United Way representing the Kanawha Valley Collective, Traci Strickland
of Prestera Center, George Gannon of the WV Housing Development Fund, Marie
Beavers of Rea of Hope, MVB Bank South Market President Jarrod Furgason, Elaine
Secrist of Rea of Hope, Margaret Taylor of YWCA Sojourner’s Shelter for Homeless
Women and Families, and David Bennett of Covenant House.
MORE THAN WORDS CAN SAY
Relationship banker goes the extra mile to connect with client
When Ibrahim Piracha reached out to MVB Relationship
Banker Taylor Lawrimore to learn more about MVB, the
lines of communication were wide open. Every prospect
conversation is unique, but this one was a little more
unique than others. Ibby—as he’s known to friends and
family—is deaf.
and you’re trying to communicate with
them as best you can. That’s what it’s like
to be deaf.”
Ibby and Taylor first met in high school, where they
would talk at lunch using American Sign Language
(ASL), a language in which Ibby was fluent but one that
Taylor had only studied for a year.
Taylor graduated from Randolph College last spring and
began working at MVB’s Leesburg, Virginia, branch. A
few months later, Ibby reached out to Taylor through
Facebook, with questions about MVB. The friends
chatted online, giving Lawrimore an opportunity to share
how MVB was different from other banks in the region.
A few weeks later, Ibby and his wife, Katherine, came into
the Leesburg branch to open their account.
So, Lawrimore decided to crack open her
old high school textbook to relearn what
she’d forgotten and continue to develop
her ASL abilities. It was difficult to pick up
after a four-year hiatus, but things began
to come back quickly.
“I really wanted to learn ASL for Ibby
and all deaf individuals, because I can
understand what it is like to be left out
of a conversation; it feels uncomfortable,”
Lawrimore said.
It also comes down to wanting to help
people, Lawrimore said, because her job
as a relationship banker is to make her
clients’ banking lives easier.
“We communicated with each other by writing notes back
and forth on a notepad,” Lawrimore said. “Imagine being
in a room full of people who speak a different language
“It also might be a little naive of me to
believe this, but our job as humans is to
help each other,” she said.
07
Lisa Mathews, Sabraton Banking Center Manager, and Tina Spangler, Treasury Services Officer, volunteer with the Deckers Court Habitat for Humanity build in Monongalia County.
MVB empowers Habitat for Humanity
branches across West Virginia
MVB’s partnership with the Mon Valley, West Virginia, branch of
Habitat for Humanity began with a chance human reconnection.
In 2014, HFH Executive Director Shawnda Cook dropped her dog
off at her veterinarian’s office, which was in the midst of building a
new facility. She noticed two familiar faces on a sign announcing the
future construction.
“I recognized Chuck Myden, who used to be my relationship banker,
and Herman DeProspero, who went to school with my brother,”
she said. “I just called them up. It was really easy to reconnect
with them.”
Founded in 1990, the Mon Valley Habitat for Humanity office serves
Monongalia County, West Virginia. Until its partnership with MVB,
the organization completed a new home in around 18 months on
average. Now, it completes four or five in a single year. Last year,
Mon Valley Habitat for Humanity expanded to serve Marion and
Preston counties.
“We couldn’t have done this without
access to the funding that MVB provides.
We’ve had some relationships with banks
in the past, but our partnership with MVB
has enabled us to do so much more.”
Shawnda Cook, Habitat for Humanity Executive Director
MVB created a financing program that could be templated in any
MVB market with a Habitat for Humanity affiliate. Other Habitat
for Humanity branches throughout West Virginia have formed
partnerships with their own local MVB banking centers. MVB
provides the organization with up-front funding for Habitat’s
construction loans, while also working as Habitat’s member bank
for the FHLBank Pittsburgh.
This membership allows Habitat for Humanity to obtain grant
money, which is used to pay off the construction loan once a home
is complete. Any surplus of grant dollars goes toward furthering
Habitat for Humanity’s mission.
But Team MVB members aren’t afraid to roll up their sleeves, too.
Every year, the bank holds Team MVB Cares Week, during which
every banking center picks a different charity to volunteer with
each day of the week. Helping out on a build is always a highlight.
Since its inception, Mon Valley Habitat for Humanity has built 57
homes and provided 232 people with affordable housing. It also
operates a second-hand store that offers gently used furniture,
building materials, and other donations to those in need.
“Habitat builds are fun,” said Herman DeProspero. “You could be
putting up walls or installing a roof. There’s a sense of camaraderie
when you’re working outside the office. We couldn’t be more
proud to help Habitat for Humanity’s cause.”
MVB FINANCIAL CORP.
BOARD OF DIRECTORS
DAVID B. ALVAREZ
Interim Chairman
Owner & CEO, Energy Transportation, LLC & Applied Construction Solutions
JAMES J. CAVA JR.
Managing Member, Cava & Banko, PLLC, Certified Public Accountants
CFO, Ryan Environmental & Ryan Environmental Transport, LLC
HARRY EDWARD DEAN III
CEO, Potomac Mortgage Group (dba MVB Mortgage), a wholly owned subsidiary of
MVB Bank
JOHN W. EBERT
President, J.W. Ebert Corporation, a McDonald’s Restaurant franchise
DANIEL W. HOLT
Co-Founder & CEO of BillGO
GARY A. LEDONNE
Executive in Residence & Master of Professional Accountancy Program Coordinator,
John Chambers College of Business and Economics of West Virginia University
LARRY F. MAZZA
President & CEO, MVB Financial Corp. and MVB Bank
DR. KELLY R. NELSON
Physician
J. CHRISTOPHER PALLOTTA
Director, Bond Insurance Agency, Inc.
SHAREHOLDER &
COMPANY INFORMATION
SHAREHOLDERS MEETING
The Annual Meeting of Shareholders of MVB Financial Corp. (MVB) will be held at 9:00
a.m. May 21, 2019, at the MVB Reston Office, 12100 Sunset Hills Road, Reston, VA 20190.
This meeting is for the purpose of considering and voting upon certain proposals. Only those
shareholders of record at the close of business on March 27, 2019, shall be entitled to notice
of the meeting and to vote at the meeting.
TRANSFER AGENT & SHAREHOLDER INQUIRIES
The corporation’s transfer agent is Computershare. Inquiries concerning transfer
requirements, lost certificates, and change of address should be directed to:
Computershare
462 South 4th Street
Louisville, KY 40202
www.computershare.com
ALL OTHER INQUIRIES
Investor inquiries to the company should be directed to:
Marcie Lipscomb
304.285.0020
mlipscomb@mvbbanking.com
ALL OTHER INQUIRIES ABOUT THE COMPANY SHOULD BE DIRECTED TO:
MVB Financial Corp.
Attn: Investor Relations
301 Virginia Avenue
Fairmont, WV 26554
844-MVB-BANK (844-682-2265)
FORM 10-K
A copy of the MVB Financial Corp. Form 10-K for 2018, which has been filed with the SEC,
is available without attachments at no charge upon written request and is also available at
http://ir.mvbbanking.com.
Inquiries should be directed to the Investor Relations contact above.
INDEPENDENT REGISTERED ACCOUNTING FIRM
Dixon Hughes Goodman LLP
809 Glen Eagles Court, Suite 200
Baltimore, MD 21286
STOCK MARKET LISTING
MVB Financial Corp. stock is traded on The NASDAQ Capital Market under the symbol:
MVBF.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2018
or
1934
For the transition period from __________ to __________.
Commission file Number 34603-9
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
West Virginia
(State or other jurisdiction of
incorporation or organization)
301 Virginia Avenue, Fairmont, WV
(Address of principal executive offices)
20-0034461
(I.R.S. Employer Identification No.)
26554
(Zip Code)
Registrant’s telephone number, including area code (304) 363-4800
(Former name, former address and former fiscal year, if changed since last report) [None]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 Par
Name of each exchange on
which registered
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” and in
Rule 12b-2 of the Exchange Act.
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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
Based upon the average selling price of sales known to the registrant of the common shares of the registrant during the period through June 30, 2018, the
aggregate market value of the common shares of the registrant held by non-affiliates during that time was $182,228,540. For this purpose, certain executive
officers and directors are considered affiliates.
Portions of the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held May 21, 2019, are incorporated by reference into
Part III of this Annual Report on Form 10-K.
As of March 7, 2019, the registrant had 11,607,293 shares of common stock outstanding with a par value of $1.00 per share.
Table of Contents
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
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Table of Contents
ITEM 1. BUSINESS
Corporate Overview
PART I
MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through
its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB
Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).
MVB Bank was chartered in 1997 and commenced operations in 1999.
In 2012, MVB Bank acquired Potomac Mortgage Group, Inc. (“PMG” which began doing business under the registered trade name
“MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services
company, Lender Service Provider, LLC (“LSP”). In 2013, this fifty percent interest (50%) in LSP was reduced to a twenty-five
percent (25%) interest and 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. In 2016, the
Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI purchased substantially all
of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million and was reported in
discontinued operations. MVB Insurance retained the assets related to, and 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.
Business Overview
The Company’s primary business activities, through its subsidiaries, are primarily community banking and mortgage banking. The
Bank offers its customers a full range of products and services including:
• Various demand deposit accounts, savings accounts, money market accounts, and certificates of deposit;
• Commercial, consumer, and real estate mortgage loans and lines of credit;
• Debit cards;
• Cashier’s checks;
•
Safe deposit rental facilities; and
• Non-deposit investment services.
The 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 Bank’s financial products and services are offered through its financial service locations and automated teller machines (“ATMs”)
in West Virginia and Virginia, as well as telephone and internet-based banking through both personal computers and mobile devices.
Non-deposit investment services are offered through an association with a broker-dealer.
Since its opening in 1999, the Bank has experienced significant growth in assets, loans, and deposits due to strong community and
customer support in Marion and Harrison counties in West Virginia, expansion into Jefferson, Berkeley, Monongalia, and Kanawha
counties in West Virginia and, most recently, into Fairfax and Loudoun counties in Virginia. Since the acquisition of PMG, mortgage
banking is now a much more significant focus, which has opened increased market opportunities in the Washington, DC metropolitan
region and added enough volume to further diversify the Company’s revenue stream.
The Company’s business activities include three reportable segments: commercial and retail banking, mortgage banking, and a
financial holding company. For a discussion of each of these reporting segments, please see Note 21, “Segment Reporting” of the
Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
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Primary Market Area and Customers
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. The Bank currently operates a total of fifteen full-service banking branches: twelve in
West Virginia and three in Virginia. MVB Mortgage operates eleven mortgage-only offices, located in Virginia, within the Washington,
DC metropolitan area, Maryland, North Carolina, and South Carolina. In addition, MVB Mortgage has mortgage loan originators
located at select Bank locations throughout West Virginia.
The Company originates various types of loans, including commercial and commercial real estate loans, residential real estate loans,
home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, the Company retains
most of its originated loans (exclusive of long-term, fixed rate residential mortgages that are sold). However, loans originated in
excess of the Bank’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by
the Bank.
The current economic climate in the Company’s primary market areas reflect economic climates that are consistent with the general
national climate. Unemployment in the United States was 3.7%, 3.9% and 4.5% in December 2018, 2017, and 2016, respectively.
The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:
Berkeley County, WV
Harrison County, WV
Jefferson County, WV
Marion County, WV
Monongalia County, WV
Kanawha County, WV
Fairfax County, VA
Loudoun County, VA
Segment Reporting
December 2018
December 2017 December 2016
3.5%
4.3%
3.0%
4.9%
3.7%
4.5%
2.1%
2.1%
3.6%
4.6%
3.0%
5.4%
3.5%
5.1%
2.6%
2.7%
3.0%
4.9%
2.6%
5.1%
3.3%
4.7%
3.0%
3.0%
The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding
company. Insurance services was previously identified as a reportable segment until entering into the Asset Purchase Agreement
with USI, as discussed above and in Note 22, “Discontinued Operations” of the Notes to the Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Revenue from commercial
and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit
accounts. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.
Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage
origination process. The mortgage banking services are conducted by MVB Mortgage. Revenue from insurance services is comprised
mainly of commissions on the sale of insurance products. None of the insurance services activity is included in continuing operations
due to the sale, as discussed below and in Note 22, “Discontinued Operations” of the Notes to the Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
For more information about each of the Company’s reportable segments, please refer to Note 21, “Segment Reporting” of the Notes
to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report
on Form 10-K.
Commercial Loans
At December 31, 2018, the Bank had outstanding approximately $941.0 million in commercial loans, including commercial,
commercial real estate, financial and agricultural loans. These loans represented approximately 72.2% of the total aggregate loan
portfolio as of that date.
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Lending Practices. Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family
residential mortgage lending, and installment lending). In addition, the payment experience on commercial loans typically depends
on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the general economy or in
a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment
and the risk involved. The primary analysis technique used in determining whether to grant a commercial loan is the review of a
schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and
principal due. In addition, the Bank reviews collateral to determine its value in relation to the loan in the event of a foreclosure.
The Bank evaluates all new commercial loans and the Credit Department facilitates an annual loan review process that ensures that
a significant portion of the commercial loan portfolio, typically a minimum of 50%, is reviewed each year under a risk-based approach.
If deterioration in credit worthiness has occurred, the Bank takes prompt action designed to assure repayment of the loan. Upon
detection of the reduced ability of a borrower to meet original cash flow obligations, the loan is considered a classified loan and
reviewed for possible downgrading or placement on non-accrual status.
Consumer Loans
At December 31, 2018, the Bank had outstanding consumer loans in an aggregate amount of approximately $9.6 million or
approximately 0.7% of the aggregate total loan portfolio.
Lending Practices: Consumer loans generally involve more risk as to collectability than mortgage loans because of the type and
nature of the collateral and, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent
upon the borrower’s continued financial stability, and thus are more likely to be adversely affected by employment loss, personal
bankruptcy, or adverse economic conditions. Credit approval for consumer loans requires demonstration of sufficiency of income
to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is
the policy of the Bank to review its consumer loan portfolio monthly and to charge-off loans that do not meet its standards and to
adhere strictly to all laws and regulations governing consumer lending.
Real Estate Loans
At December 31, 2018, the Bank had approximately $353.9 million of residential real estate loans, home equity lines of credit, and
construction mortgages outstanding, representing 27.1% of total loans outstanding.
Lending Practices: The Bank generally requires that the residential real estate loan amount be no more than 80% of the purchase
price or the appraised value of the real estate securing the loan, unless the borrower obtains private mortgage insurance for the
percentage exceeding 80%. Occasionally, the Bank may lend up to 100% of the appraised value of the real estate. Loans made in
this lending category are generally one to ten-year adjustable rate, fully amortizing to maturity mortgages. MVB Bank also originates
fixed rate real estate loans and generally sells these loans in the secondary market. Most real estate loans are secured by first mortgages
with evidence of title in favor of the Bank in the form of an attorney’s opinion of the title or a title insurance policy. MVB Bank also
requires proof of hazard insurance with the Bank named as the mortgagee and as the loss payee. Full appraisals are obtained from
licensed appraisers for the majority of loans secured by real estate.
Home Equity Loans: Home equity lines of credit are generally made as second mortgages by MVB Bank. The maximum amount
of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage.
The Bank will lend up to 89.9% of the appraised value of the property at higher interest rates which are considered compatible with
the additional risk assumed in these types of loans. The home equity lines of credit are written with 10 year terms, but are subject to
review upon request for renewal.
Construction Loans: Construction financing is generally considered to involve a higher degree of risk of loss than long-term
financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, MVB may advance funds beyond the amount originally committed to permit
completion of the project. Also, note that with respect to construction loans, the Bank generally makes loans to the homeowner and
not to builders. At December 31, 2018, residential mortgage construction loans to individuals totaled approximately $93.2 million
with an average life of 8 months and are generally refinanced to a permanent loan upon completion of the construction.
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Competition
The Company experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes
principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage
firms and pension funds. The primary factors in competing for loans are interest rate and overall lending services. Competition for
deposits comes from other commercial banks, savings associations, money market funds and credit unions as well as from insurance
companies and brokerage firms. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity,
convenience of office location and overall financial condition. The Company believes that its community approach provides flexibility,
which enables the Bank to offer an array of banking products and services. MVB Mortgage faces significant competition from both
traditional financial institutions and other national and local mortgage banking operations.
The Company primarily focuses on the Marion, Harrison, Jefferson, Berkeley, Monongalia and Kanawha County markets in West
Virginia and the northern Virginia area for its products and services. Management believes it has developed a level of expertise in
serving this area.
The Company operates under a “needs-based” selling approach that management believes has proven successful in serving the
financial needs of most customers. It is not the Company’s strategy to compete solely on the basis of interest rates. Management
believes that a focus on customer relationships and service will promote our customers’ continued use of our financial products and
services and will lead to enhanced revenue opportunities.
Supervision and Regulation
The Company, the Bank and its subsidiaries are subject to extensive regulation under federal and state laws. The Company’s earnings
are affected by general economic conditions, management policies, changes in state and federal laws and regulations and actions of
various regulatory authorities, including those referred to in this section. The following discussion describes elements of an extensive
regulatory framework applicable to bank holding companies, financial holding companies, and banks and contains specific
information about the Company. Regulation of banks, bank holding companies, and financial holding companies is intended primarily
for the protection of depositors, the insurance fund of the Federal Deposit Insurance Corporation (“FDIC”) and the stability of the
financial system, rather than for the protection of shareholders and creditors.
In addition to banking laws, regulations and regulatory agencies, the Company is subject to various other laws, regulations, supervision
and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Company
and its ability to make distributions to shareholders. State and federal law govern the activities in which the Bank engages, the
investments it makes, and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance
laws and regulations also affect the Company’s operations.
The following discussion is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are
described. Such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and
state regulatory agencies. The likelihood and timing of any such changes and the impact such changes may have on the Company
is impossible to determine with any certainty. A change in statutes, regulations or regulatory policies applicable to the Company and
its subsidiary could have a material effect on our business, financial condition or our results of operations.
Financial Regulatory Reform
During the past several years, there has been a significant increase in regulation and regulatory oversight for U.S. financial services
firms, primarily resulting from the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) in 2010. The Dodd-Frank Act is extensive, complicated, and comprehensive legislation that impacts practically all aspects of
a banking organization, representing a significant overhaul of many aspects of the regulation of the financial services industry. The
Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banks, bank holding
companies, and financial holding companies such as the Company. The Dodd-Frank Act imposes new prudential regulation on
depository institutions and their holding companies. As such, the Company is subject to more stringent standards and requirements
with respect to (1) bank and nonbank acquisitions and mergers, (2) the “financial activities” in which it engages as a financial holding
company, (3) affiliate transactions and (4) proprietary trading, among other provisions.
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted,
which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. These
modifications include, among other changes: (i) exempting banks with less than $10 billion in assets from the ability-to-repay
requirements for certain qualified residential mortgage loans held in portfolio; (ii) not require appraisals for certain transactions
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valued at less than $400,000 in rural areas; (iii) exempt banks that originate fewer than 500 open-end and 500 closed-end mortgages
from the Home Mortgage Disclosure Act’s expanded data disclosures; (iv) clarify that, subject to various conditions, reciprocal
deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of
obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations;
(v) raise eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplify capital calculations
by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to
average consolidated assets) at a percentage not less than 8% and not greater than 10% that upon the election of a bank would replace
the risk-based capital requirements. In addition, the Federal Reserve Board was required to raise the asset threshold under its Small
Bank Holding Company Policy Statement from $1 billion to $3 billion for bank holding companies that are exempt from consolidated
capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking
activities.
Certain provisions of the Dodd-Frank Act and other laws, such as the EGRRCPA, are subject to further rulemaking, guidance and
interpretation by the applicable federal regulators. New regulations and statutes are regularly proposed and/or adopted that contain
wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating and
doing business in the United States. Changes in leadership at various federal banking agencies, including the Federal Reserve, can
also change the policy direction of these agencies. Certain of these recent proposals and changes are described below. The Company
will continue to evaluate the impact of any new regulations so promulgated, including changes in regulatory costs and fees,
modifications to consumer products or disclosures required by the Consumer Financial Protection Bureau (“CFPB”) and the
requirements of the enhanced supervision provisions, among others.
Regulatory Agencies
The Company is a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. As a financial holding
company and a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended
(“BHCA”), and it and its subsidiary are subject to inspection, examination and supervision by the Board of Governors of the Federal
Reserve System (“Federal Reserve Board”). The BHCA provides generally for “umbrella” regulation of financial holding companies
such as the Company by the Federal Reserve Board, and for functional regulation of banking activities by bank regulators, securities
activities by securities regulators, and insurance activities by insurance regulators. The Company is also under the jurisdiction of the
Securities and Exchange Commission (“SEC”) and is subject to the disclosure and regulatory requirements of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as administered by the SEC.
The Bank is a West Virginia state chartered bank. The Bank is not a member bank of the Federal Reserve System (“non-member
bank”). Accordingly, the West Virginia Division of Financial Institutions and the FDIC are the primary regulators of the Bank.
Bank Holding Company Activities
In general, the BHCA limits the business of bank holding companies to banking, managing or controlling banks and other activities
that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank
holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the
shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined
by the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and
does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely
determined by the Federal Reserve Board), without prior approval of the Federal Reserve Board. Activities that are financial in nature
include securities underwriting and dealing, insurance underwriting and making merchant banking investments. Under current federal
law, as a bank holding company, the Company has elected to become a financial holding company.
Most of the financial activities that are permissible for financial holding companies also are permissible for a bank’s “financial
subsidiary,” except for insurance underwriting, insurance company portfolio investments, real estate investments and development,
and merchant banking, which must be conducted by a financial holding company. In order for a financial subsidiary of a bank to
engage in permissible financial activities, federal law requires, among other conditions, that the parent bank be well managed and
have at least a satisfactory Community Reinvestment Act rating, and the parent bank and all of its bank affiliates must be well
capitalized.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be
“well capitalized” and “well managed” under applicable Federal Reserve Board regulations and the depository institution subsidiaries
controlled by the company must have at least a satisfactory Community Reinvestment Act rating. A depository institution subsidiary
is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the sections captioned “Capital
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Requirements” and “Prompt Corrective Action,” included elsewhere in this item. A depository institution subsidiary is considered
“well managed” if it received a composite rating of 1 or 2 and management rating of at least “satisfactory” in its most recent
examination. If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve Board’s
regulations provide that the financial holding company must enter into an agreement with the Federal Reserve Board to comply with
all applicable capital and management requirements. Until the financial holding company returns to compliance, the Federal Reserve
Board may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader
financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without
prior approval of the Federal Reserve Board. If the company does not return to compliance within 180 days, the Federal Reserve
Board may require divestiture of the holding company’s depository institutions. Under the Riegle-Neal lnterstate Banking and
Branching Efficiency Act of 1994, banks must be both well capitalized and well managed to merger with a bank with a different
home state. If a depository institution receives a rating of less than satisfactory under the Community Reinvestment Act, the financial
holding company may not commence any additional financial activity or acquire a company engaged in financial activity, until the
bank subsidiary has achieved at least a rating of satisfactory under the Community Reinvestment Act.
In order for a financial holding company to commence any new activity permitted by the BHCA or to acquire a company engaged
in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must
have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See the
section captioned “Community Reinvestment Act” included elsewhere in this item.
The Federal Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that
continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of
any bank subsidiary of the bank holding company.
As required by the EGRRCPA, in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability
of the Federal Reserve Board’s Small Bank Holding Company Policy Statement. The interim final rule raised the policy statement’s
asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding
company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities;
and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding that are registered
with the SEC. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve Board may exclude a
company from the threshold increase. Management believes the Company meets the conditions of the Federal Reserve Board’s Small
Bank Holding Company Policy Statement and is therefore excluded from consolidated capital requirements and is subject to specific
debt to equity ratio requirements. To be considered well capitalized, a company subject to the Small Bank Holding Company Policy
Statement must meet certain requirements, including having a debt-to-equity ratio of 1.0:1 or less. Further, qualification as a small
bank holding company allows the Company to file more abbreviated, and less frequent, consolidated and holding company reports
with the Federal Reserve. The Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Federal Securities Regulation
The Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC
under the Exchange Act of 1934, as amended (the “Exchange Act”). We are subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-
Oxley Act”), which imposes numerous reporting, accounting, corporate governance and business practices on companies, as well
as financial and other professionals who have involvement with the U.S. public markets. We are generally subject to these requirements
and applicable SEC rules and regulations.
Acquisitions
The BHCA, the Bank Merger Act, West Virginia banking law, and other federal and state statutes regulate acquisitions of commercial
banks and their parent holding companies. The BHCA requires the prior approval of the Federal Reserve Board for the direct or
indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding
company. Under the Bank Merger Act, the prior approval of the FDIC or other appropriate bank regulatory authority is required for
a non-member bank to merge with another bank or purchase substantially all of the assets or assume any deposits of another bank.
In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider,
among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization,
the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment
Act (see the section captioned “Community Reinvestment Act” included elsewhere in this item) and its compliance with consumer
protection laws and the effectiveness of the subject organizations in combating money laundering activities.
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Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation.
Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to market
share limitations and any state requirement that the target bank shall have been in existence and operating for a minimum period of
time. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches
under applicable federal or state law. These regulatory considerations are applicable to privately negotiated acquisition transactions.
Other Safety and Soundness Regulations
The Federal Reserve Board has enforcement powers over bank holding companies and their nonbanking subsidiaries. The Federal
Reserve Board has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule,
regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance
of cease and desist orders, civil money penalties or other actions.
Federal and state banking regulators also have broad enforcement powers over the Bank, including the power to impose fines and
other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of the Bank for the benefit of depositors
and other creditors. The West Virginia commissioner of banking also has the authority to take possession of a West Virginia state
bank in certain circumstances, including, among other things, when it appears necessary in order to protect or preserve the assets of
that bank for the benefit of depositors and other creditors.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and
terrorist financing. The USA PATRIOT Act of 2001, or the USA Patriot Act, substantially broadened the scope of United States anti-
money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes
and penalties and expanding the extra-territorial jurisdiction of the United States. The USA Patriot Act contains anti-money laundering
measures affecting insured depository institutions, broker-dealers and certain other financial institutions. Financial institutions are
prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence
procedures in their dealings with certain types of high-risk customers and implement a written customer identification program.
Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report
certain types of suspicious transactions. The USA Patriot Act includes the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001, which grants the Secretary of the U.S. Treasury broad authority to establish regulations and to impose
requirements and restrictions on financial institutions’ operations. The U.S. Treasury has issued a number of regulations to implement
the USA Patriot Act under this authority requiring financial institutions to maintain appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing. Regulatory authorities routinely examine financial institutions
for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat
money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or
acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these
obligations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, administers and enforces economic and trade sanctions
against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals
and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking
accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and
reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational
consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when
regulatory approval is required or to prohibit such transactions even if approval is not required.
Incentive Compensation
The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements
of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews are tailored to
each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation
arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies will be incorporated
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into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-
management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not
taking prompt and effective measures to correct the deficiencies.
In June 2010, the Federal Reserve Board, Office of the Comptroller of the Currency (“OCC”), and FDIC issued comprehensive final
guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations
do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers
all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is
based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that
do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with
effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors.
In June 2016, the Federal Reserve Board, other federal banking agencies, and the SEC jointly published a proposed rulemaking
designed to strengthen the incentive-based compensation practices at covered institutions by better aligning the financial rewards
for covered persons with an institution’s long-term safety and soundness. The proposed rule uses a tiered approach that applies
provisions to covered financial institutions according to three categories of average total consolidated assets: Level 1 ($250 billion
or more), Level 2 ($50 billion to $250 billion), and Level 3 ($1 billion to $50 billion). For all covered institutions, the proposed rule
would (i) prohibit types and features of incentive-based compensation arrangements that encourage inappropriate risks because they
are “excessive” or “could lead to material financial loss” at a covered institution, (ii) require incentive-based compensation
arrangements to adhere to three basic principles: (1) a balance between risk and reward; (2) effective risk management and controls;
and (3) effective governance, and (iii) require appropriate board or directors (or committee) oversight and record keeping and
disclosures to the appropriate agency. For Level 1 and Level 2 institutions, the proposed rule would (i) require the following: the
deferral of awards for senior executive officers and significant risk takers; the subjecting of unpaid and unvested incentive
compensation to the risk of downward adjustments or forfeiture; the subjecting of paid incentive compensation to the risk of
“clawback;” establishing a board compensation committee; expanded risk-management and control standards; additional record
keeping requirements for senior executive officers and significant risk takers; and detailed policies and procedures to ensure rule
compliance and (ii) prohibit certain inappropriate practices, including: the purchase of hedging instruments that offset decreases in
the value of incentive compensation; allowing a range of payouts that might encourage risk taking; and basing compensation solely
on comparison to peer and volume-driven incentives without regard to transaction quality or compliance with sound risk management.
The comment period ended in July 2016.
If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in
which we may structure compensation for our executives.
In addition, SEC regulations require public companies, like the Company, to provide various disclosures about executive compensation
in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive
compensation.
The scope and content of the U.S. banking regulators’ policies on incentive compensation and SEC rulemaking with respect to
executive compensation are continuing to develop.
The Volcker Rule
The Volcker Rule implements section 619 of the Dodd-Frank Act and prohibits insured depository institutions and affiliated companies
(together, “banking entities”) from engaging in short-term proprietary trading of certain securities, derivatives, and commodity
futures, and options on these instruments, for their own account and prohibits banking entities from investing in certain types of
funds (“covered funds”). The requirements of the Volcker Rule as implemented and any proposed changes are not expected to have
a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Volcker Rule does not
significantly impact the operations of the Company and its subsidiary, as we do not have any significant engagement in the businesses
prohibited by the Volcker Rule. EGRRCPA exempts from the Volcker Rule banking entities with $10 billion or less in total consolidated
assets and have total trading assets and trading liabilities that are less than 5% of total consolidated assets. Implementation of this
provision is subject to a rulemaking which is in process. The Company and the Bank are below these thresholds and thus exempt
from the Volcker Rule, subject to a rulemaking implementing this EGRRCPA provision. That rulemaking is in process.
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Limit on Dividends
The Company is a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. The Company’s ability
to obtain funds for the payment of dividends and for other cash requirements largely depends on the amount of dividends the Bank
declares. However, the Federal Reserve Board expects the Company to serve as a source of financial and managerial strength to the
Bank to reduce potential loss exposure to the Bank’s depositors and to the FDIC insurance fund in the event the Bank becomes
insolvent or is in danger of becoming insolvent. Under this requirement, the Company is expected to commit resources to support
the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by
the Company to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In
the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital
of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Accordingly, the Federal Reserve Board may require the Company to retain capital for further investment in the Bank, rather than
pay dividends to its shareholders. The Bank may not pay dividends to the Company if, after paying those dividends, the Bank would
fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The
Bank must have the approval from the West Virginia Division of Financial Institutions if a dividend in any year would cause the
total dividends for that year to exceed the sum of the current year’s net earnings as defined and the retained earnings for the preceding
two years as defined, less required transfers to surplus. These provisions could limit the Company’s ability to pay dividends on its
outstanding common shares.
In addition, the Company and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums (See “Capital Requirements”, below). The
appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of
a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment
thereof. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an
inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends
only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve Board
has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that
are at maximum allowable levels unless both asset quality and capital are very strong.
Transactions with Affiliates
Transactions between the Bank and its subsidiaries, on the one hand, and the Company or any other subsidiary, on the other hand,
are regulated under federal banking law. The Federal Reserve Act, made applicable by section 8(j) of the FDIA, imposes quantitative
and qualitative requirements and collateral requirements on covered transactions by the Bank with, or for the benefit of, its affiliates,
and generally requires those transactions to be on terms at least as favorable to the Bank as if the transaction were conducted with
an unaffiliated third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase
of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate,
certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as
collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In general, any such
transaction by the Bank or its subsidiaries must be limited to certain thresholds on an individual and aggregate basis and, for credit
transactions with any affiliate, must be secured by designated amounts of specified collateral.
Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to
entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of non-
repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such
persons individually and in the aggregate.
Capital Requirements
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.
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The Capital Rules, among other things, (i) include a “Common Equity Tier 1” (“CET1”) measure, (ii) specify that Tier 1 capital
consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by
requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of
capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Under the Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage
ratio”).
The Capital Rules also include a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-
weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will
increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The Capital Rules also provide for a
“countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability to
the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and
effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted
assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer)
will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
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. Because the amendments were proposed with a request for comments and
have not been finalized, we do not yet know what effect the final rules will have on the Bank’s capital calculations. In November
2017, the federal banking agencies extended for community banks the existing capital requirements for certain items, including
mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions,
and minority interest, which were scheduled to change effective January 1, 2018, in light of the simplification amendments being
considered.
In June 2016, the Financial Accounting Standards Board issued an update to the accounting standards for credit losses that included
the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain
financial assets. CECL becomes effective January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final
rule providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the
implementation of CECL.
Notwithstanding the foregoing, the EGRRCPA simplifies capital calculations by requiring regulators to establish for insured
depository institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets)
at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based
capital requirements under the Capital Rules. Such institutions that meet the community bank leverage ratio will automatically be
deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualify for the
community bank leverage ratio test based on the institution’s risk profile. The federal banking agencies have proposed a community
bank leverage ratio of 9% with additional parameters, including limited amounts of off-balanced sheet exposure. That proposal has
not been finalized, and until such time, the Capital Rules as described above remain in effect. The effective date and specific
requirements for the community bank leverage ratio are unknown.
With respect to the Bank, the Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the
Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”
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Prompt Corrective Action
The FDIA requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository
institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository
institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other
factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules that became
effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of
6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any
order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii)
“adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or
greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii)
“undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a
Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the
institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio
of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal
to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category
that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of
applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s
overall financial condition or prospects for other purposes.
As noted above, the EGRRCPA will eliminate these requirements for banks with less than $10.0 billion in assets who elect to follow
the community bank leverage ratio once regulators finalize the regulation.
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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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 this Annual Report on Form 10-K.
Safety and Soundness Standards
The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal
controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset
growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial
standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards
relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the
agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an
agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance
plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “Prompt
Corrective Action” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Deposit Insurance
The Bank’s deposits are insured by the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based deposit
premium assessment system that determines assessment rates for an insured depository institution based on an assessment rate
calculator, which is based on a number of elements to measure the risk each insured depository institution poses to the FDIC insurance
fund. The assessment rate is applied to total average assets less tangible equity, as defined under the Dodd-Frank Act. The assessment
rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums
are assessed quarterly.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding
company, with respect to any extensions of credit they have made to such insured depository institution.
Federal Home Loan Bank (“FHLB”) membership
The FHLB provides credit to its members in the form of advances. As a member of the FHLB of Pittsburgh, the Bank must maintain
an investment in the capital stock of that FHLB in an amount equal to 0.10% of the calculated Member Asset Value (“MAV”) plus
4.00% of outstanding advances and 0.75% of outstanding letters of credit. The MAV is determined by taking line item values for
various investment and loan classes and applying an FHLB haircut to each item. At December 31, 2018, the Bank held capital stock
of FHLB in the amount of $11.3 million.
Federal and State Consumer Laws
The Company and the Bank are subject to a number of federal and state consumer protection laws that extensively govern our
relationship with our customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
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Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage
Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service
Members Civil Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair
and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms
of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit
report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise
interest rates and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in
significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal
bank regulators, state attorneys general, and state and local consumer protection agencies may also seek to enforce consumer protection
requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and
local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection
requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions
we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
Consumer Financial Protection
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers.
These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings
Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing
Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and
these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair, deceptive, and abusive acts and
practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts,
provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information,
provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our ability to raise interest rates and
subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential
liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal financial regulators,
state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements
and obtain these and other remedies, including regulatory sanctions, customer rescission rights and civil money penalties. Failure to
comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for
merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is
not required.
The CFPB is a federal agency responsible for implementing, examining and enforcing compliance with federal consumer protection
laws. The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including,
among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB can issue cease-and-desist
orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an
entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. The Dodd-Frank Act permits
states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain
circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. The CFPB
also has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates, which
authority would not apply to the Company or the Bank. As the Bank’s principal federal regulator, the FDIC has examination and
enforcement authority over the Bank.
The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank
Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending,
and servicing practices. The CFPB issued final rules changing the reporting requirements for lenders under the Home Mortgage
Disclosure Act. The new rules expand the range of transactions subject to these requirements to include most securitized residential
mortgage loans and credit lines. The rules also increase the overall amount of data required to be collected and submitted, including
additional data points about the loans and borrowers. The expanded data is being collected as of January 1, 2018.
Financial Privacy
Federal law currently contains extensive customer privacy protection provisions, including substantial customer privacy protections
provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley Act). Under these
provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter,
the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These
provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to
unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer
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is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to
obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. In December 2015, Congress
amended the Gramm-Leach-Bliley Act privacy provisions to include an exception under which if a financial institution meets certain
conditions, it is not required to provide annual privacy notices to customers. In August 2018, the CFPB finalized a rule implementing
this provision, and that rule became effective September 17, 2018.
Automated Overdraft Payment Regulation
Federal regulators have adopted consumer protection regulations and guidance related to automated overdraft payment programs
offered by financial institutions. Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on
automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for
those types of transactions. Financial institutions must also provide consumers with a notice that explains the financial institution’s
overdraft services, including the fees associated with the service and the consumer’s choices. In addition, FDIC-supervised institutions
must monitor overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective” follow-
up action with customers that overdraw their accounts more than six times during a rolling 12-month period. Financial institutions
must also impose daily limits on overdraft charges, review and modify check-clearing procedures, prominently distinguish account
balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment
programs.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their
market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet
the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities.
The CRA requires the Bank’s primary federal bank regulatory agency, the FDIC, to assess the bank’s record in meeting the credit
needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are
assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.”
In order for a financial holding company to commence any new activity permitted by the BHCA, or to acquire any company engaged
in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must
have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take
into account CRA ratings when considering a request for an approval of a proposed transaction to consolidate with or acquire the
assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management
processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate
customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s
management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and
maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected
to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and
restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory
guidance, we could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to
store sensitive data. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious
activity, as well as to report on any suspected advanced persistent threats. Notwithstanding our defensive measures, the threat from
cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive
measures. While to date, we are not aware that we have experienced a significant compromise, significant data loss or any material
financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under
constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity
attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats,
as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and
our customers. For further discussion of risks related to cybersecurity, see Item 1A, Risk Factors, of this Annual Report on Form 10-
K.
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Monetary Policy and Economic Conditions
The business of financial institutions is affected not only by general economic conditions, but also by the policies of various
governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit
conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government
securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’
deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits,
and the interest rates charged on loans, as well as the interest rates paid on deposit accounts.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in
the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and
the money markets and the activities of monetary and fiscal authorities, the Company cannot predict future changes in interest rates,
credit availability or deposit levels.
Effect of Environmental Regulation
The Company’s primary exposure to environmental risk is through its lending activities. In cases when management believes
environmental risk potentially exists, the Company mitigates its environmental risk exposures by requiring environmental site
assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal
potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites.
Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.
With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual
basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit.
The Company anticipates no material effect on anticipated capital expenditures, earnings or competitive position as a result of
compliance with federal, state or local environmental protection laws or regulations.
Other Regulatory Matters
The Company is subject to examinations and investigations by federal and state banking regulators, as well as the SEC, various
taxing authorities and various state regulators. The Company periodically receives requests for information from regulatory authorities
in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory
authorities, concerning the Company’s business and accounting practices. Such requests are considered incidental to the normal
conduct of business.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures
may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states.
Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which
existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof,
cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate
and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital,
require modifications to our business strategy, and limit our ability to pursue business opportunities in an efficient manner. A change
in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material, adverse
effect on our business, financial condition and results of operations.
Corporate and available information
We file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and any other filings required by the SEC. We make available through our website (http://www.mvbbanking.com), free of charge,
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those
reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information
on our website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file
with the SEC.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.
ITEM 1A. RISK FACTORS
The following discussion sets forth some of the more important risk factors that could materially affect our financial condition,
results of operations, business and prospects. Other factors that could affect the Company’s financial condition and operations are
discussed in the “Forward-Looking Statements” section below (Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations). The risks and uncertainties described below are not the only ones facing us. Additional risks and
uncertainties that management is not aware of or that management currently deems immaterial may also impair our business operations.
You should carefully consider the risks and uncertainties described below together with all of the information included or incorporated
by reference in this Annual Report on Form 10-K. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
If any of the following risks actually occur, our business, financial condition and results of operations could be materially and
adversely affected.
References to “we,” “us,” and “our” in this “Risk Factors” section refer to the Company and its subsidiary, including the Bank, unless
otherwise specified or unless the context otherwise requires.
Risks Related to Economic and Market Conditions
Our business depends upon the general economic conditions of the State of West Virginia and the Commonwealth of
Virginia, and may be adversely affected by downturns in these and the other local economies in which we operate.
In recent years, economic growth and business activity across a wide range of industries and regions in the U.S. has been slow and
uneven. Furthermore, there are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken
to address that debt. In addition, oil price volatility, the level of U.S. debt and global economic conditions have had a destabilizing
effect on financial markets.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding
loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly
dependent upon the business environment in the markets where we operate, including the State of West Virginia and the
Commonwealth of Virginia and the United States as a whole. A favorable business environment is generally characterized by, among
other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence,
and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic
growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and
capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other factors.
While the U.S. economy experienced growth during 2018, with increasing exports, jobs, and manufacturing production, continued
economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer
and business spending, borrowing and savings habits. Such conditions, combined with continued oil price volatility, could have a
material adverse effect on the credit quality of our loans and our business, financial condition and results of operations.
Our success depends primarily on the general economic conditions of the State of West Virginia and the Commonwealth of Virginia
and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically
diversified, we provide banking and financial services primarily to customers across West Virginia and Virginia. The local economic
conditions in these areas have a significant impact on the demand for our products and services as well as the ability of our customers
to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Moreover, approximately
49.9% of the securities in our municipal securities portfolio were issued by political subdivisions or agencies within the State of
West Virginia and the Commonwealth of Virginia. A significant decline in general economic conditions in State of West Virginia
and the Commonwealth of Virginia, whether caused by recession, inflation, unemployment, changes in oil prices, changes in securities
markets, acts of terrorism, outbreak of hostilities or other international or domestic occurrences or other factors could impact these
local economic conditions and, in turn, have a material adverse effect on our business, financial condition and results of operations.
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A significant portion of our loans are secured by real estate concentrated in the State of West Virginia and the
Commonwealth of Virginia, which may adversely affect our earnings and capital if real estate values decline.
Nearly 77.7% of our total loans are real estate interests (residential, nonresidential including both owner-occupied and investment
real estate, and construction and land development) mainly concentrated in the State of West Virginia and the Commonwealth of
Virginia, a relatively small geographic area. As a result, declining real estate values in these markets could negatively impact the
value of the real estate collateral securing such loans. If we are required to liquidate a significant amount of collateral during a period
of reduced real estate values in satisfaction of any non-performing or defaulted loans, our earnings and capital could be adversely
affected.
The value of the securities in our investment securities portfolio may be negatively affected by disruptions in securities
markets.
Due to credit and liquidity risks and economic volatility, making the determination of the value of a securities portfolio is less certain.
A decline in market value associated with these disruptions could result in other-than-temporary or permanent impairments of these
assets, which would lead to accounting charges which could have a material negative effect on our financial condition and results
of operations.
Risks Related to Our Business
Our nonresidential real estate loans expose us to greater risks of nonpayment and loss than residential mortgage loans,
which may cause us to increase our allowance for loan losses which would reduce our net income.
At December 31, 2018, $950.6 million, or 72.9%, of our loan portfolio consisted of nonresidential real estate loans. Nonresidential
real estate loans generally expose a lender to greater risk of non-payment and loss than residential mortgage loans because repayment
of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans expose
us to additional risks because they typically are made on the basis of the borrower’s ability to make repayments from the cash flow
of the borrower’s business and are secured by collateral that may depreciate over time. These loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Because such loans generally
entail greater risk than residential mortgage loans, we may need to increase our allowance for loan losses in the future to account
for the likely increase in probable incurred credit losses associated with the growth of such loans, which would reduce our net income.
Also, many of our nonresidential real estate borrowers have more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an
adverse development with respect to a residential mortgage loan.
Our allowance for loan losses could become inadequate and reduce earnings and capital.
The Bank maintains an allowance for loan losses that it believes is adequate for absorbing the estimated future losses inherent in its
loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the
allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of the Bank’s
clients relative to their financial obligations with it. The amount of future losses, however, is susceptible to changes in economic and
other market conditions, including changes in interest rates and collateral values, which are beyond the Bank’s control, and these
future losses may exceed its current estimates. Management performs stress tests on the loan portfolios to estimate future loan losses,
but additional provisions for loan losses could be required in the future, including as a result of changes in the economic assumptions
underlying management’s estimates and judgments, adverse developments in the economy on a national basis or in the Bank’s market
area, or changes in the circumstances of particular borrowers. We cannot predict with absolute certainty the amount of losses or
guarantee that the allowance for loan losses is adequate to absorb future losses in the loan portfolio. Excessive loan losses could
have a material adverse effect on the Company’s financial condition and results of operations.
The profitability of MVB Mortgage will be significantly reduced if we are not able to sell mortgages.
Currently, we generally sell all of the mortgage loans originated by MVB Mortgage. The profitability of MVB Mortgage depends
in large part upon our ability to originate a high volume of loans and to sell them in the secondary market. Thus, we are dependent
upon (i) the existence of an active secondary market and (ii) our ability to sell loans into that market.
MVB Mortgage’s ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-
family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae and Freddie
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Mac and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market
in residential mortgage loans. Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are
government-sponsored enterprises with substantial market influence whose activities are governed by federal law. Any future changes
in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-institutional
investors or any impairment of our ability to participate in such programs could, in turn, adversely affect our operations.
Our largest source of revenue (net interest income) is subject to interest rate risk.
The Bank’s financial condition and results of operations are significantly affected by changes in interest rates. The Bank’s earnings
depend primarily upon its net interest income, which is the difference between its interest income earned on its interest-earning
assets, such as loans and investment securities, and its interest expense paid on its interest-bearing liabilities, consisting of deposits
and borrowings. Moreover, the loans included in our interest-earning assets are primarily comprised of variable and adjustable rate
loans. Net interest income is subject to interest rate risk in the following ways:
•
In general, for a given change in interest rates, the amount of change in value (positive or negative) is larger for assets and
liabilities with longer remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and
investment income differently.
• The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response
to changes in interest rates. For example, if interest rates decline sharply, loans may pre-pay, or pay down, faster than
anticipated, thus reducing future cash flows and interest income. Conversely, if interest rates increase, depositors may cash
in their certificates of deposit prior to maturity (notwithstanding any applicable early withdrawal penalties) or otherwise
reduce their deposits to pursue higher yielding investment alternatives.
• Re-pricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling
rate environment, if assets re-price faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and
liabilities re-price at the same time, they may not be by the same increment. For instance, if the Federal Funds Rate increased
50 basis points, rates on demand deposits may rise by 10 basis points; whereas rates on prime-based loans will instantly
rise 50 basis points.
Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude
of changes to net interest income, net economic value and investment income resulting from the hypothetical increases and decreases
in interest rates. Interest rate risk is more fully described under the section captioned “Interest Rate Risk” in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and in the section captioned “Interest Rate Sensitivity
Management” in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Annual Report on Form 10-K.
Our accounting policies and estimates are critical to how we report our financial condition and results of operations,
and any changes to such accounting policies and estimates could materially affect how we report our financial condition
and results of operations.
Accounting policies and estimates are fundamental to how we record and report our financial condition and results of operations.
Our management makes judgments and assumptions in selecting and adopting various accounting policies and in applying estimates
so that such policies and estimates comply with U.S. generally accepted accounting principles (“GAAP”).
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain
the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained
either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a liability. Because
of the uncertainty surrounding our judgments and the estimates pertaining to these matters, actual outcomes may be materially
different from amounts previously estimated. For example, because of the inherent uncertainty of estimates, the Bank could need to
significantly increase its allowance for loan losses if actual losses are more than the amount reserved. Any increase in its allowance
for loan losses or loan charge-offs could have a material adverse effect on our financial condition and results of operations. In addition,
we cannot guarantee that we will not be required to adjust accounting policies or restate prior financial statements. See the section
captioned “Allowance for Loan Losses” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations, located elsewhere in this Annual Report on Form 10-K for further discussion related to our process for determining the
appropriate level of the allowance for loan losses.
Further, from time to time, the Financial Accounting Standards Board and SEC change the financial accounting and reporting standards
that govern the preparation of our financial statements. The ongoing economic recession has resulted in increased scrutiny of
accounting standards by legislators and our regulators, particularly as they relate to fair value accounting principles. In addition,
ongoing efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to
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GAAP. These changes can be hard to predict and can materially impact how we record and report our financial condition and results
of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior
period financial statements or otherwise adversely affecting our financial condition or results of operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure
to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions
expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the
collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative
exposure due to us. Any such losses could have a material adverse effect on our business, financial condition and results of operations.
We operate in a highly competitive industry and market area and failure to effectively compete could have a material
adverse effect on our business, financial condition, and results of operations.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and
may have more financial resources. Such competitors primarily include national, regional, and community banks within the various
markets where we operate. We also face competition from many other types of financial institutions, including, without limitation,
savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The
financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and
continued consolidation. Also, technology and other changes have lowered barriers to entry and made it possible for non-banks to
offer products and services traditionally provided by banks. For example, consumers can maintain funds that would have historically
been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills
and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as
“disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated
from those deposits. Further, many of our competitors have fewer regulatory constraints and may have lower cost structures.
Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader
range of products and services as well as better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
• The ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical
standards and safe, sound assets.
• The ability to expand our market position.
• The scope, relevance and pricing of products and services offered to meet customer needs and demands.
• The rate at which we introduce new products and services relative to our competitors.
• Customer satisfaction with our level of service.
•
Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth
and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Our accounting estimates and risk management processes rely on analytical and forecasting models which may prove
to be inadequate or inaccurate which could result in unexpected losses, insufficient allowances for loan losses, or
unexpected fluctuations in the value of our financial instruments.
The processes we use to estimate our inherent loan losses and to measure the fair value of financial instruments, as well as the
processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of
operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate,
particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may
prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest
rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest
rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan
losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are
inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could
realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a
material adverse effect on our business, financial condition and results of operations.
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The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2018, we had $18.5 million of goodwill and other intangible assets. A significant decline in our expected future
cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the
price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible
assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the
appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business.
There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully
developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and
resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not
be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations,
competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business
or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact
on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and
implementation of new lines of business or new products or services could have a material adverse effect on our business, financial
condition and results of operations.
Potential acquisitions may disrupt our business and dilute stockholder value.
We generally seek merger or acquisition partners that are culturally similar and have experienced management and possess either
significant market presence or have potential for improved profitability through financial management, economies of scale or
expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions,
including, among other things:
Potential exposure to unknown or contingent liabilities of the target company.
Potential disruption to our business.
Potential diversion of our management’s time and attention.
•
• Exposure to potential asset quality issues of the target company.
•
•
• The possible loss of key employees and customers of the target company.
• Difficulty in estimating the value of the target company.
•
Potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible
book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize
the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an
acquisition could have a material adverse effect on our business, financial condition and results of operations.
The Company is subject to liquidity risk, which could disrupt our ability to meet our financial obligations.
Liquidity refers to the ability of the Company to ensure sufficient levels of cash to fund operations, such as meeting deposit withdrawals,
funding loan commitments, paying expenses and meeting quarterly payment obligations under certain subordinated debentures issued
by the Company in connection with the issuance of floating rate redeemable trust preferred securities. The source of the funds for
the Company’s debt obligations is dependent on the Bank.
Any significant restriction or disruption of the Company’s ability to obtain funding from these or other sources could have a negative
effect on the Company’s ability to satisfy its current and future financial obligations, which could materially affect the Company’s
financial condition.
Limited availability of borrowings and liquidity from the FHLB system and other sources could negatively impact
earnings.
The Bank is currently a member bank of the FHLB of Pittsburgh. Membership in this system of quasi-governmental, regional home-
loan oriented agency banks allows us to participate in various programs offered by the FHLB. We borrow funds from the FHLB,
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which are secured by a blanket lien on certain residential and commercial mortgage loans, and if applicable, investment securities
with collateral values in excess of the outstanding balances. Current and future earnings shortfalls and minimum capital requirements
of the FHLB may impact the collateral necessary to secure borrowings and limit the borrowings extended to their member banks,
as well as require additional capital contributions by member banks. Should this occur, our short-term liquidity needs could be
negatively impacted. If we were restricted from using FHLB advances due to weakness in the system or with the FHLB of Pittsburgh,
we may be forced to find alternative funding sources. If we are required to rely more heavily on higher cost funding sources, revenues
may not increase proportionately to cover these costs, which would adversely affect results of operations and financial position.
We may not be able to attract and retain the skilled people necessary to conduct our business.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities
engaged in by us can be intense and we may not be able to hire people or to retain them. Many of our branches are located in rural
areas and small towns where the competition for labor can be fierce, and where the pool of qualified employees may be small. The
unexpected loss of services of key personnel could have a material adverse impact on our business, financial condition and results
of operations because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding
qualified replacement personnel.
Interruption to our information systems or breaches in security, including as a result of cyber attacks or other cyber
incidents, could adversely affect the Company’s operations or otherwise harm our business.
The Company relies on information systems and communications for operating and monitoring all major aspects of business, as well
as internal management functions. Any failure, interruption, intrusion or breach in security of these systems could result in failures
or disruptions in the customer relationship, management, general ledger, deposit, loan and other systems.
There have been several cyber-attacks on websites of large financial services companies. Even if not directed at the Company
specifically, attacks on other entities with whom we do business or on whom we otherwise rely or attacks on financial or other
institutions important to the overall functioning of the financial system could adversely affect, directly or indirectly, aspects of our
business.
Cyber-attacks on third party retailers or other business establishments that widely accept debit card or check payments could
compromise sensitive Bank customer information, such as debit card and account numbers. Such an attack could result in significant
costs to the Bank, such as costs to reimburse customers, reissue debit cards and open new customer accounts.
In addition, there have been efforts on the part of third parties to breach data security at financial institutions, including through the
use of social engineering schemes such as “phishing.” The ability of our customers to bank remotely, including online and through
mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches. Because
the techniques used to attack financial services company communications and information systems change frequently (and generally
increase in sophistication), attacks are often not recognized until launched against a target and we may be unable to address these
techniques in advance of attacks, including by implementing adequate preventative measures. We may also be unable to prevent
attacks that are supported by foreign governments or other well-financed entities and that may originate from less regulated and
remote areas of the world.
The occurrence of any such failure, disruption or security breach of our information systems, particularly if widespread or resulting
in financial losses to our customers, could damage our reputation and our relationships with our partners and customers, result in a
loss of customer business, subject us to additional regulatory scrutiny, and expose us to civil litigation and possible financial liability.
These risks could have a material effect on our business, results of operations and financial condition.
We continually encounter technological change and failure to continually adapt to such change could materially impact
our financial condition and results of operations.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. Our future success depends, in part, upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be
able to effectively implement new technology-driven products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a
material adverse effect on our business, financial condition and results of operations.
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Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with
banks having no branches within our market area, which could affect net income.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills
and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the country,
which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. This process
could result in the loss of fee income, as well as the loss of client deposits and the income generated from those deposits, in addition
to increasing our funding costs.
Our operations rely on certain external vendors who may not perform in a satisfactory manner.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual
arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks including,
among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition and (iii)
changes in the vendor’s support for existing products and services. The failure of an external vendor to perform in accordance with
applicable contractual arrangements or the service level agreements could be disruptive to our operations, which could have a material
adverse impact on the our business and its financial condition and results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on
and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on
these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury
and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected
property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of
real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation
costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business,
financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our
business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our
ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to
repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue
and/or cause us to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on
our business, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and
counterparties which, if inaccurate, could have a material adverse impact on our financial condition and results of
operations.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers
and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations
of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a
material adverse impact on our business, financial condition and results of operations.
Risks Related to the Legal and Regulatory Environment
Changes in tax laws, including those included in the Tax Cuts and Jobs Act, may adversely affect our performance and
create the risk that we may need to adjust our accounting for these changes.
We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad
valorem taxes. Changes to our taxes could have a material adverse effect on our performance. In addition, our customers are subject
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to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may adversely affect their ability to purchase
homes or consumer products, which could adversely affect their demand for our loans and deposit products. In addition, such negative
effects on our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed securities
in which we have invested.
On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act” (the “Tax Reform Act”) was enacted into law. This
new tax legislation made significant changes to U.S. tax laws and includes numerous provisions that affect businesses, such as ours.
Among other things, the Tax Reform Act (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates
the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable
year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense,
for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions
related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the
exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility
of deposit insurance premiums. The Tax Reform Act is unclear in certain respects and will require interpretations and implementing
regulations by the Internal Revenue Service, as well as state tax authorities, and could be subject to amendments and technical
corrections, any of which could lessen or increase the adverse (and positive) impacts of the Tax Form Act. The accounting treatment
of these tax law changes is complex, and some of the changes may affect both current and future periods. As discussed elsewhere
in this Annual Report on Form 10-K, as a result of the Tax Reform Act the Company was required to re-measure its deferred tax
asset, resulting in an income tax charge of $646 thousand for the year ended December 31, 2017. Any future adjustments or changes
resulting from the Tax Reform Act could affect our current or future financial statements, or both.
We are subject to extensive government regulation and supervision and possible enforcement and other legal actions
that could detrimentally affect our business.
We, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision,
which vests a significant amount of discretion in the various regulatory authorities. Banking regulations are primarily intended to
protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations
and supervisory guidance affect our lending practices, capital structure, investment practices, dividend policy and growth, among
other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes.
Other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or
implementation of statutes, regulations, policies or supervisory guidance, could affect us in substantial and unpredictable ways. Such
changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability
of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations,
policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal
and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil
money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are
pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which
heightens the risks associated with actual and perceived compliance failures. Any of the foregoing could have a material adverse
effect on our business, financial condition and results of operations.
For further detail, see the sections captioned “Supervision and Regulation” included in Item 1, Business, and Note 14, “Regulatory
Capital Requirements” of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K.
Failure to meet any of the various capital adequacy guidelines which we are subject to could adversely affect our
operations and could compromise the status of the Company as a financial holding company.
The Company and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements
imposed by the Federal Reserve Board, the FDIC and the U.S. Department of Treasury. If the Company or the Bank fails to meet
these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations would be
materially and adversely affected and could compromise the status of the Company as a banking holding company. See the sections
captioned “Supervision and Regulation—Capital Requirements” in Item 1, Business, and Note 14, “Regulatory Capital Requirements”
of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this
Annual Report on Form 10-K, for detailed capital guidelines for bank holding companies and banks.
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The Company is a financial holding company, and its sources of funds are limited.
The Company is a financial holding company and its operations are primarily conducted by the Bank, which is subject to significant
federal and state regulation. Cash available to pay dividends to shareholders of the Company is derived primarily from dividends
paid by the Bank. As a result, the Company’s ability to receive dividends or loans from its subsidiary is restricted. Under federal law,
the payment of dividends by the Bank is subject to capital adequacy requirements. The Federal Reserve Board and/or the FDIC
prohibit a dividend payment by the Company or the Bank that would constitute an unsafe or unsound practice. See the sections
captioned “Supervision and Regulation – Limit on Dividends” in Item 1, Business, and Note 14, “Regulatory Capital Requirements”
of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
The inability of the Bank to generate profits and pay such dividends to the Company, or regulator restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the financial condition and results of operations of the
Company and the Company’s ability to pay dividends to its shareholders.
In addition, since the Company is a legal entity separate and distinct from the Bank, its right to participate in the distribution of assets
of the Bank upon the Bank’s liquidation, reorganization or otherwise will be subject to the prior claims of the Bank’s creditors, which
will generally take priority over the Bank’s shareholders.
Risks Associated With Our Common Stock
The trading volume in our common stock is less than that of other larger financial services companies.
Shares of our common stock began trading on the Nasdaq Capital Market on December 7, 2017 under the symbol “MVBF,” and
were previously traded on the OTC Bulletin Board. There has been limited trading in our shares over the last 12 months. If limited
trading in the common stock continues, it may be difficult for investors to sell such shares in the public market at any given time at
prevailing prices. Also, the sale of a large block of common stock could depress the market price of the common stock to a greater
degree than a company that typically has a higher volume of trading of its securities.
If we are unable to maintain compliance with Nasdaq listing requirements, our stock could be delisted, and the trading
price, volume and marketability of our stock could be adversely affected.
As of December 7, 2017, our common stock began trading on the Nasdaq Capital Market. Previously, our common stock was traded
on the OTC Bulletin Board. There can be no assurances, however, that we will be able to maintain compliance with Nasdaq’s present
listing standards, or that Nasdaq will not implement additional listing standards with which we will be unable to comply. Failure to
maintain compliance with Nasdaq listing requirements could result in the delisting of our shares from trading on the Nasdaq system,
which could have a material adverse effect on the trading price, volume and marketability of our common stock.
Our stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry;
perceptions in the marketplace regarding us and/or our competitors;
new technology used, or services offered, by competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or
involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
changes in government regulations; and
geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, including real or anticipated changes in the strength of the economies we serve; industry factors and
general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes, oil price
volatility or credit loss trends could also cause our stock price to decrease regardless of operating results.
26
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Our ability to pay dividends is not certain and we may be unable to pay future dividends. As a result, capital appreciation,
if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.
Our ability to pay dividends in the future is not certain. Any future determination relating to dividend policy will be made at the
discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements,
financial condition, future prospects, regulatory restrictions and other factors that our Board of Directors may deem relevant. The
holders of our common stock are entitled to receive dividends when, and if declared by our Board of Directors out of funds legally
available for that purpose. As part of our consideration of whether to pay cash dividends, we intend to retain adequate funds from
future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by
federal policies and regulations and by the terms of our existing indebtedness. It is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common stock only out of net income available over the past year and only if
prospective earnings retention is consistent with the organization’s expected future needs and financial condition. For further
information, see the section captioned “Supervision and Regulation – Limit on Dividends” in Item 1, Business, of this Annual Report
on Form 10-K.
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. At December 31, 2018, we have no material
weaknesses in our internal control over financial reporting but a material weakness could occur in the future. A “material weakness”
is a control deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to maintain a system of internal
control over financial reporting that meets the requirements of Section 404, we might be subject to sanctions or investigation by
regulatory authorities. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors
to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material
weakness, our financial statements may be inaccurate, we may not have access to the capital markets, and our stock price may be
adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company, through its Bank subsidiary, owns its main office located at 301 Virginia Avenue in Fairmont, West Virginia. The
Company’s subsidiary owns or leases various other offices in the counties and cities in which they operate. As of December 31, 2018,
the Company operated fifteen full-service banking branches and eleven mortgage-only offices, with locations as further described
in Item 1, Business, of this Annual Report on Form 10-K. Eight of the fifteen full-service banking branches are owned and the
remaining seven are leased. All mortgage locations are leased.
No one facility is material to the Company. Management believes that the facilities are generally in good condition and suitable for
the operations for which they are used. However, management continually looks for opportunities to upgrade its facilities and locations
and may do so in the future.
Additional information concerning the property and equipment owned or leased by the Company and its subsidiary is incorporated
herein by reference from Note 4, “Premises and Equipment” and Note 16, “Leases” of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company and its subsidiary 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.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the Nasdaq Capital Market under the symbol “MVBF.”
The table presented below provides the quarterly high and low sales prices, closing sales price and dividends declared for the last
two years. The information set forth in the table is based on knowledge of certain arms-length transactions in the stock. In addition,
dividends are subject to the restrictions described in Note 15, “Regulatory Restriction on Dividend” of the Notes to the Consolidated
Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Quarterly Market and Dividend Information:
2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
Last
Dividend
$
19.53
$
17.11
$
18.04
$
19.45
19.75
20.00
16.24
17.73
17.86
18.02
18.05
19.75
$
20.40
$
18.26
$
20.10
$
18.90
13.25
14.00
13.05
12.55
12.70
18.80
13.20
12.75
0.030
0.030
0.025
0.025
0.025
0.025
0.025
0.025
MVB Financial Corp. had 1,012 stockholders of record at March 7, 2019.
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The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends)
on the Company’s common stock to the KBW Bank Index and the Russell 2000 Index. The stock performance graph assumes $100
was invested on December 31, 2013, and the cumulative return is measured as of each subsequent fiscal year end.
Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
MVB Financial Corp.
$
100.00
$
90.78
$
79.88
$
78.55
$
123.13
$
KBW Bank Index
Russell 2000
100.00
100.00
107.22
103.53
105.52
97.62
132.53
116.63
154.07
131.96
111.39
123.87
115.89
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
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ITEM 6. SELECTED FINANCIAL DATA
The following consolidated summary sets forth the Company’s selected financial data that has been derived from the Company’s
audited consolidated financial statements for each of the periods and at the dates indicated
(Dollars in thousands except per share data)
Balance Sheet Data:
Assets
Investment securities
Loans, net
Loans held for sale
Deposits
Stockholders’ equity
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan loss
Net interest income after provision for loan loss
Noninterest income
Noninterest expense
Income from continuing operations, before income taxes
Income tax expense - continuing operations
Net Income from continuing operations
Income (loss) from discontinued operations, before income taxes
Income tax expense (benefit) - discontinued operations
Net Income (loss) from discontinued operations
Net Income
Preferred dividends
Net Income available to common shareholders
Per Share Data:
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per share per common shareholder - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per share per common shareholder - diluted
Cash dividends
Book value
Tangible book value 1
Asset Quality Ratios:
Nonperforming loans to gross loans
Nonperforming assets to total assets
Net charge-offs to gross loans
Allowance for loan losses to gross loans
Selected Ratios:
Return on average assets - continuing operations
Return on average assets - discontinued operations
Return on average equity - continuing operations
Return on average equity - discontinued operations
Dividend payout
Efficiency ratio
Equity to assets
Common equity tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
$
$
$
2018
1,750,969
231,213
1,293,427
75,807
1,309,154
176,773
11,030,984
12,722,003
69,760
17,706
52,054
2,440
49,614
38,640
72,878
15,376
3,373
12,003
—
—
—
12,003
489
11,514
1.04
—
1.04
1.00
—
1.00
0.11
14.55
12.92
0.54%
0.53
0.11
0.84
0.73%
—
7.46
—
10.16
80.36
10.10
11.16
12.02
13.78
9.87
$
$
$
Years Ended December 31,
2016
2017
2015
1,534,302
231,507
1,096,063
66,794
1,159,580
150,192
10,308,738
10,440,228
56,598
12,301
44,297
2,173
42,124
40,706
70,500
12,330
4,755
7,575
—
—
—
7,575
498
7,077
0.69
—
0.69
0.68
—
0.68
0.10
13.63
11.80
0.88%
0.72
0.13
0.89
0.52%
—
5.23
—
13.64
82.94
9.79
10.55
11.54
14.87
9.27
$
$
$
1,418,804
162,368
1,043,764
90,174
1,107,017
145,624
8,212,021
10,068,733
54,123
11,132
42,991
3,632
39,359
43,205
69,209
13,355
4,378
8,977
6,346
2,411
3,935
12,912
1,128
11,784
0.96
0.48
1.44
0.92
0.39
1.31
0.08
12.93
11.01
0.59%
0.47
0.24
0.86
0.63%
0.28
7.30
3.20
5.00
80.29
10.26
10.11
11.92
15.36
9.54
$
$
$
$
$
$
1,384,476
123,115
1,024,164
102,623
1,012,314
114,712
8,104,316
8,140,116
44,100
9,225
34,875
2,493
32,382
34,955
57,848
9,489
2,886
6,603
353
140
213
6,816
575
6,241
0.75
0.03
0.78
0.74
0.03
0.77
0.08
12.20
9.81
0.99%
0.76
0.07
0.78
0.54%
0.02
5.89
0.19
9.40
82.84
8.29
7.59
9.47
12.91
7.77
2014
1,110,459
122,751
792,074
69,527
823,227
109,438
7,905,468
8,102,117
36,168
7,511
28,657
2,582
26,075
22,022
45,194
2,903
248
2,655
(920)
(344)
(576)
2,079
332
1,747
0.29
(0.07)
0.22
0.29
(0.07)
0.22
0.08
11.59
9.44
1.16%
0.89
0.16
0.78
0.26%
(0.06)
2.57
(0.56)
30.59
89.18
9.86
N/A
12.03
16.40
8.98
1 This is a non-GAAP measure that the Company believes is helpful to interpreting financial results. For a reconciliation to the most
directly comparable GAAP financial measure, please see “Non-GAAP Financial Measure Reconciliation” below.
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(Dollars in thousands except per share data)
2018
2017
2016
2015
2014
Non-GAAP Financial Measure Reconciliation
Years Ended December 31,
Goodwill
Core deposit intangibles
Total intangibles
Total Equity
Less: Preferred equity
Less: Total intangibles
Tangible common equity
18,480
550
19,030
176,773
(7,834)
(19,030)
149,909
18,480
646
19,126
150,192
(7,834)
(19,126)
123,232
Tangible common equity
Common shares outstanding
Tangible book value per common share
149,909
11,607,293
12.92
123,232
10,444,627
11.80
18,480
744
19,224
145,624
(16,334)
(19,224)
110,066
110,066
9,996,544
11.01
18,480
845
19,325
114,712
(16,334)
(19,325)
79,053
79,053
8,061,921
9.81
17,778
1
17,779
109,438
(16,334)
(17,779)
75,325
75,325
7,983,285
9.44
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements:
Statements in this Annual Report on Form 10-K that are based on other than historical data are “forward-looking 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 subsidiary (collectively, “we,” “our,” or “us”),
including the Bank; and
statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan,” “projects,” “outlook” or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the
Company’s or the Bank management’s views as of any subsequent date. Forward-looking statements involve significant risks and
uncertainties (both known and unknown) and actual results may differ materially from those presented, either expressed or implied,
including, but not limited to, those presented in this Management’s Discussion and Analysis section. Factors that might cause such
differences include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the ability of the Company, the Bank, and MVB Mortgage to successfully execute business plans, manage risks, and achieve
objectives;
changes in local, national and international political and economic conditions, including without limitation changes in the
political and economic climate, economic conditions and fiscal imbalances in the United States and other countries, potential
or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major
developments, including wars, natural disasters, military actions, and terrorist attacks;
changes in financial market conditions, either internationally, nationally or locally in areas in which the Company, the Bank,
and MVB Mortgage conduct operations, including without limitation, reduced rates of business formation and growth,
commercial and residential real estate development and real estate prices;
fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market
liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios,
demand for loan products, deposit flows and competition;
the ability of the Company, the Bank, and MVB Mortgage to successfully conduct acquisitions and integrate acquired
businesses;
potential difficulties in expanding the businesses of the Company, the Bank, and MVB Mortgage in existing and new
markets;
increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments;
changes in fiscal, monetary, regulatory, trade and tax policies and laws, including the recently enacted Tax Reform Act, and
regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Federal Reserve, and the FDIC;
the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact the ability
of the Company and its subsidiaries, and other American financial institutions to retain and recruit executives and other
personnel necessary for their businesses and competitiveness;
the impact of the Dodd-Frank Act and of new international standards known as Basel III, and rules and regulations thereunder,
many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental
assessments on us, the scope of business activities in which we may engage, the manner in which the Company, the Bank,
and MVB Mortgage engage in such activities, the fees that the Company’s subsidiaries may charge for certain products and
services, and other matters affected by the Dodd-Frank Act and these international standards;
continuing consolidation in the financial services industry; new legal claims against the Company, the Bank, and MVB
Mortgage, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes
in existing legal matters;
success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
changes in consumer spending and savings habits;
increased competitive challenges and expanding product and pricing pressures among financial institutions;
inflation and deflation;
technological changes and the implementation of new technologies by the Company and its subsidiaries;
the ability of the Company, the Bank, and MVB Mortgage to develop and maintain secure and reliable information technology
systems;
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•
•
•
legislation or regulatory changes which adversely affect the operations or business of the Company, the Bank, and MVB
Mortgage;
the ability of the Company, the Bank, and MVB Mortgage to comply with applicable laws and regulations; changes in
accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies;
and
costs of deposit insurance and changes with respect to FDIC insurance coverage levels.
Certain risk factors that might cause actual results may differ materially from those presented are more fully described in this Annual
Report on Form 10-K within Part I, Item 1A, Risk Factors, and from time to time, in other filings with the SEC. Actual results may
differ materially from those expressed in or implied by any forward-looking statement. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of this report. Except to the extent required by law,
the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the
forward-looking statements included herein to reflect future events or developments.
In this Management’s Discussion and Analysis, we review and explain the general financial condition and the results of operations
for MVB Financial Corp. and its subsidiaries. We have designed this discussion to assist you in understanding the significant changes
in the Company’s financial condition and results of operations. We have used GAAP to prepare the accompanying consolidated
financial statements. We engaged Dixon Hughes Goodman LLP to audit the consolidated financial statements and internal controls
over financial reporting and their independent audit reports are included herein.
Introduction
The following discussion and analysis of the Consolidated Financial Statements is presented to provide insight into management’s
assessment of the financial results and operations of the Company. You should read this discussion and analysis in conjunction with
the audited Consolidated Financial Statements and footnotes and the ratios and statistics contained elsewhere in this Annual Report
on Form 10-K.
Application of Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the
banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect
the amounts reported in the consolidated financial statements; accordingly, as this information changes, the consolidated financial
statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the
use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to
be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent
upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair
values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market
prices or are provided by other third-party sources, when available. When third-party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.
The most significant accounting policies followed by the Company are presented in Note 1, “Summary of Significant Accounting
Policies” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data,
of this 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.
Allowance for Loan Losses
The Allowance for Loan Losses (“ALL”) represents management’s estimate of probable credit losses inherent in the loan portfolio.
Determining the amount of the ALL 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
34
Table of Contents
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 this Annual Report on Form
10-K, describes the methodology used to determine the ALL and a discussion of the factors driving changes in the amount of the
ALL.
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These
securities are reported at amortized cost.
Available-for-Sale Securities - Includes debt that will be held for indefinite periods of time. These securities may be sold in
response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative
investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported
as a separate component of stockholders’ equity, net of estimated income tax effect.
Equity Securities - Includes equity securities that are adjusted to fair value on a monthly basis, with the change in value recorded
directly on the income statement.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed
by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific
identification of the adjusted cost of each security.
Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the
present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined
as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the
security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery
in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other
than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell
the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any
remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other
comprehensive income, net of applicable taxes. A decline in value that is considered to be other-than-temporary is recorded as a loss
within noninterest income in the consolidated statement of income.
Common stock of the FHLB represents ownership in an institution which is wholly owned by other financial institutions. These
equity securities are accounted for at cost, less impairment and are classified as other assets.
See Note 2, “Investment Securities” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements
and Supplementary Data, of this Annual Report on Form 10-K for the Company’s policy regarding the other than temporary impairment
of investment securities.
Goodwill and Other Intangible Assets
As discussed 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 this Annual Report on Form 10-K, the Company must assess goodwill
and other intangible assets each year for impairment. This assessment involves estimating the fair value of the Company’s reporting
units. If the fair value of the reporting unit is less than its carrying value including goodwill, the Company would be required to take
a charge against earnings to write down the assets to the lower value.
Deferred Tax Assets
The Company uses an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized.
If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may
be applied, the asset may not be realized and our net income will be reduced. Management also evaluates deferred tax assets to
determine if it is more likely than not that the deferred tax benefit will be utilized in future periods. If not, a valuation allowance is
recorded. Our deferred tax assets are described further in Note 8, “Income Taxes” of the Notes to the Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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Recent Accounting Pronouncements and Developments
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. This update requires a reclassification from accumulated other comprehensive income (“AOCI”) to
retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act,
which was enacted on December 22, 2017. The Tax Reform Act included a reduction to the corporate income tax rate from 34
percent to 21 percent effective January 1, 2018. The amendments in the ASU are effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 during the first
quarter of 2018 and elected to reclassify the income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount
of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate
income tax rate, which amounted to $646 thousand.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the
existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce
complexity in fair value hedges of interest-rate risk. The ASU eliminates the requirement to separately measure and report hedge
ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the hedged item. The ASU also changes certain documentation and assessment requirements and modifies the
accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public business entities
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is early adopting this ASU in
accordance with paragraph ASC 815-20-65-3 subpart C. The adoption of this ASU did not have a significant impact on the Company’s
financial condition, results of operations and consolidated financial statements. However, by early adopting, the Company is now
able to pursue additional hedging strategies as described above, including the ability to apply fair value hedge accounting to a specified
pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events. This will allow the
Company to better align its accounting and the financial reporting of its hedging activities with their economic objectives thereby
reducing the earnings volatility resulting from these hedging activities.
In March 2017, the FASB issued ASU 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain
purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased
callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities
that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium).
For public companies, this update will be effective for fiscal years beginning after December 15, 2018, including all interim periods
within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it
is our current policy to amortize premiums of investment securities to the earliest call date.
In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350), currently requires an entity that has not elected the private
company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an
entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of
that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the
reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting
unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this update
remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment
as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the
reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies,
this update will be effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal
years. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected
credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial
assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase
price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses,
with such allowance limited to the amount by which fair value is below amortized cost. The guidance is effective for fiscal years
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beginning after December 15, 2019 and interim periods within those fiscal years. The Company’s project management team and
Management Loan Committee (“MLC”) engaged a third party to assist with a data gap analysis and will utilize the data to determine
the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist with implementation
that will be tested throughout 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
(1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
(2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where
necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. ASU 2016-02 initially required transition using a modified retrospective approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU
2018-11, Leases (Topic 842) - Targeted Improvements, which, among other things, provides an additional transition method that
would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December
2018, the FASB also issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements, for Lessors which provides certain
policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon the adoption of ASU 2016-02,
ASU 2018-11, and ASU 2018-20 on January 1, 2019, the Company expects to recognize right-of-use assets and related lease liabilities
ranging from $12.0 million to $13.0 million and $15.0 million to $16.0 million, respectively. The Company expects to elect to apply
certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any
existing leases. The Company also does not expect to apply the recognition requirements of ASU 2016-02 to any short-term leases
(as defined by related accounting guidance). The Company also expects to account for lease and non-lease components separately
because such amounts are readily determinable under our lease contracts and because the Company expects this election will result
in a lower impact on our balance sheet. The Company expects to utilize the modified-retrospective transition approach prescribed
by ASU 2018-11.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement
(Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation.
The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes
in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable
fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and
significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability
at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the
balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax
assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. The Company adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on
January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with 5) above,
the Company measures fair value of its loan portfolio on a quarterly basis using an exit price notion. See Note 17, “Fair Value of
Financial Instruments” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement
creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue
guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or
services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or
services. The five steps are, (1) identify the contract with the customer, (2) identify the separate performance obligations in the
contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and
(5) recognize revenue when each performance obligation is satisfied. The Company evaluated the impact of this standard on individual
customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and
revenue streams. The Company determined that this standard did not have a material impact on its consolidated financial statements
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because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan
interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards
and out of scope of ASC 606 revenue standard. The Company also completed an evaluation of certain costs related to customer
contracts and revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus
net). Based on the evaluation, the Company determined that the classification of certain debit and credit card related costs should
change (i.e., costs previously recorded as expense are now recorded as contra-revenue). This classification change resulted in
immaterial changes to both revenue and expense. The Company adopted the revenue recognition standard and its related amendments
as of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new
guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified
retrospective approach, the Company did not adjust prior period amounts for the debit and credit card related cost reclassifications
noted above.
Summary Financial Results
Excluding discontinued operations, the Company earned $12.0 million in 2018 compared to $7.6 million in 2017, an increase of
$4.4 million. The 2018 earnings equated to a return on average assets of 0.73% and a return on average equity of 7.46%, compared
to 2017 results of 0.52% and 5.23%, respectively. Basic earnings per share were $1.04 in 2018 compared to $0.69 in 2017. Diluted
earnings per share were $1.00 in 2018 compared to $0.68 in 2017.
Excluding discontinued operations, the Company earned $7.6 million in 2017 compared to $9.0 million in 2016, a decrease of $1.4
million. The 2017 earnings equated to a return on average assets of 0.52% and a return on average equity of 5.23%, compared to
2016 results of 0.63% and 7.30%, respectively. Basic earnings per share were $0.69 in 2017 compared to $0.96 in 2016. Diluted
earnings per share were $0.68 in 2017 compared to $0.92 in 2016.
Net interest income increased $7.8 million, noninterest income decreased $2.1 million, and noninterest expenses increased by $2.4
million during 2018 compared to 2017. The Company’s yield on earning assets in 2018 was 4.58% compared to 4.17% in 2017.
Total loans increased by $198.4 million to $1.3 billion at December 31, 2018.
Net interest income increased $1.3 million, noninterest income decreased $2.5 million and noninterest expenses increased by $1.3
million during 2017 compared to 2016. The Company’s yield on earning assets in 2017 was 4.17% compared to 4.05% in 2016.
Total loans increased by $53.1 million to $1.1 billion at December 31, 2017.
Deposits increased $149.6 million to $1.3 billion at December 31, 2018, from $1.2 billion at December 31, 2017. The Bank offers
an uncomplicated product design accompanied by a simple fee structure that is attractive to customers. The overall cost of interest-
bearing liabilities for the Company was 1.37% in 2018 compared to 1.04% in 2017. This cost of interest-bearing liabilities, combined
with the earning asset yield, resulted in a net interest margin of 3.41% in 2018 compared to 3.27% in 2017.
Deposits increased $52.6 million to $1.2 billion at December 31, 2017, from $1.1 billion at December 31, 2016. The overall cost of
interest-bearing liabilities for the Company was 1.04% in 2017 compared to 0.93% in 2016. Increasing the asset yield at a faster
pace than the cost of interest-bearing liabilities resulted in a net interest margin of 3.27% in 2017 compared to 3.22% in 2016.
Interest Income and Expense
Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing
liabilities. Interest-earning assets include loans, investment securities and certificates of deposit in other banks. Interest-bearing
liabilities include interest-bearing deposits and borrowed funds such as sweep accounts and repurchase agreements. Net interest
income remains the primary source of revenue for the Bank. Net interest income is also impacted by changes in market interest rates,
as well as the mix of interest-earning assets and interest-bearing liabilities. Net interest income is also impacted favorably by increases
in noninterest bearing demand deposits and equity.
Net interest margin is calculated by dividing net interest income by average interest-earning assets and serves as a measurement of
the net revenue stream generated by the Bank’s balance sheet. Net interest margin was 3.41% in 2018 compared to 3.27% and 3.22%
in 2017 and 2016, respectively. The net interest margin continues to face considerable pressure due rising interest rates and competitive
pricing of loans and deposits in the Bank’s markets. During 2018, the Federal Reserve raised its key interest rate from a range of
1.25% to 1.50% to a range of 2.25% to 2.50%. Management’s estimate of the impact of future changes in market interest rates is
shown in the section captioned “Interest Rate Risk.”
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Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-
bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk. Net interest
spread was 3.21% in 2018 compared to 3.13% and 3.12% in 2017 and 2016, respectively. The difference between the net interest
margin and net interest spread was 20 basis points in 2018 compared to 14 basis points in 2017. This was due to an increase of $53.9
million in average noninterest bearing demand deposits.
Company management continues to analyze methods to deploy assets into an earning asset mix which will result in a stronger net
interest margin. Loan growth continues to be strong and management anticipates that loan activity will remain strong in the near
term future.
During 2018, net interest income increased by $7.8 million, or 17.5%, to $52.1 million from $44.3 million in 2017. This increase is
largely due to the growth in average earning assets, primarily $24.3 million in taxable investment securities and $102.7 million in
commercial loans. Average total earning assets was $1.52 billion in 2018 compared to $1.36 billion in 2017. Average total loans and
loans held for sale increased to $1.28 billion in 2018 from $1.15 billion in 2017, primarily as the result of a $102.7 million increase
in average commercial loans. As a result of the increase in average total earning assets, total interest income increased by $13.2
million, or 23.3%, to $69.8 million in 2018 from $56.6 million in 2017. Average investment securities increased $44.7 million, as
the result of a $24.3 million increase in taxable investments and a $20.4 million increase in tax-exempt investments. Yield on tax-
exempt securities increased 38 basis points and taxable securities yield increased 27 basis points. Average interest-bearing liabilities
increased in 2018 by $111.3 million. The increase was primarily the result of a $57.3 million increase in the average balance of
certificates of deposit, a $68.5 million increase in the average balance of borrowings, and a $5.4 million increase in the average
balance of money market checking accounts, partially offset by a $5.3 million decrease in the average balance of NOW accounts, a
$5.0 million decrease in the average balance of repurchase agreements and federal funds sold, and a $7.8 million decrease in the
average balance of subordinated debt due to conversions into common stock. Average interest-bearing deposits grew to $1.1 billion
in 2018 from $1.0 billion in 2017. Total interest expense increased by $5.4 million, caused primarily by a $3.3 million increase in
deposit interest and a $2.6 million increase in interest on FHLB and other borrowings. The result was a 33 basis point increase in
the cost of interest bearing liabilities from 2017 to 2018.
During 2017, net interest income increased by $1.3 million, or 3.0%, to $44.3 million from $43.0 million in 2016. This increase is
largely due to the growth in net interest income margin, primarily the 15 basis point increase in loans and loans held for sale. Average
total earning assets were $1.4 billion in 2017 compared to $1.3 billion in 2016. Average total loans and loans held for sale decreased
to $1.15 billion in 2017 from $1.17 billion in 2016. Primarily as a result of the growth in net interest income margin, total interest
income increased by $2.5 million, or 4.6%, to $56.6 million in 2017 from $54.1 million in 2016. Average investment securities
increased $44.0 million, mainly as the result of a $49.3 million increase in taxable investments and a $5.3 million average decrease
in tax-exempt investments. Yield on tax-exempt securities increased 28 basis points, while taxable securities increased 33 basis
points. Average interest-bearing liabilities, mainly driven by borrowings, decreased in 2017 by $9.9 million. Average interest-bearing
deposits grew to $1.0 billion in 2017 from $992.7 million in 2016. Total interest expense increased by $1.2 million, caused primarily
by a $546 thousand increase in deposit interest and a $604 thousand increase in interest on FHLB and other borrowings. The result
was an 11 basis point increase in interest expense from 2016 to 2017.
The Company’s average earning assets increased $167.8 million and net interest income increased by $7.8 million during 2018. The
net interest margin continues to be pressured by rising rates, increased competition for high quality loan growth and the deposit
volume required to fund the growth.
The Bank’s yield on earning assets changed during 2018 as follows: the loan portfolio yield increased by 45 basis points and the
investment portfolio yield increased by 34 basis points while the cost of interest bearing liabilities increased by 33 basis points.
The cost of interest-bearing liabilities increased to 1.37% in 2018 from 1.04% in 2017. This increase is primarily the result of a 85
basis point increase in the cost of borrowings and a 21 basis point increase on deposits. Further discussion on borrowings is included
in Note 6, “Borrowed Funds” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
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Statistical Financial Information Regarding MVB Financial Corp.
The following tables provide further information about interest income and expense:
Average Balances and Analysis of Net Interest Income:
(Dollars in thousands)
Assets
2018
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2017
Interest
Income/
Expense
Yield/
Cost
Average
Balance
2016
Interest
Income/
Expense
Yield/
Cost
2.09% $
3,790
$
2.00
14,619
1.37% $
16,347
$
1.97
11,694
94
228
0.58%
1.95
2.38
3.55
5.05
3.48
4.75
5.07
4.94
4.58
0.75
1.00
0.07
1.59
1.76
0.30
2.23
6.81
1.37
Interest-bearing deposits in banks
$
5,176
$
CDs with other banks
Investment securities:
Taxable
Tax-exempt
Loans and loans held for sale: 1
Commercial
Tax exempt
Real estate
Consumer
Total loans
Total earning assets
Less: Allowance for loan losses
Cash and due from banks
Other assets
Total assets
Liabilities
Deposits:
NOW
Money market checking
Savings
IRAs
CDs
Repurchase agreements and federal funds
sold
FHLB and other borrowings
Subordinated debt
14,778
150,134
79,161
854,108
14,352
395,302
11,349
1,275,111
1,524,360
(10,530)
16,828
106,600
$ 1,637,258
$ 432,789
$
245,008
44,049
17,894
319,720
18,536
190,686
25,774
108
295
3,580
2,810
43,099
499
18,794
575
62,967
69,760
3,246
2,455
29
285
5,620
56
4,259
1,756
Total interest-bearing liabilities
1,294,456
17,706
Noninterest bearing demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Preferred stock
Common stock
Paid-in capital
Treasury stock
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
171,631
10,304
1,476,391
7,834
11,082
107,669
(1,084)
42,509
(7,143)
160,867
Total liabilities and stockholders’ equity
$ 1,637,258
1,366
1,853
32,620
564
16,594
804
50,582
54,123
2,413
1,282
88
208
3,757
72
1,086
2,226
1.79
2.89
4.44
3.45
4.16
4.80
4.34
4.05
0.53
0.78
0.20
1.27
1.19
0.27
0.78
6.64
0.93
52
288
2,658
1,863
33,896
520
16,612
709
51,737
56,598
125,797
58,786
751,444
15,064
373,360
13,660
1,153,528
1,356,520
(9,626)
16,287
90,585
2.11
3.17
4.51
3.45
4.45
5.19
4.49
4.17
76,525
64,108
734,829
16,326
398,766
16,762
1,166,683
1,335,357
(8,939)
13,765
87,815
$ 1,453,766
$ 1,427,998
$ 438,123
$
239,632
47,034
16,678
262,417
23,559
122,144
33,524
2,608
1,781
78
217
3,610
75
1,690
2,242
1,183,111
12,301
0.60
0.74
0.17
1.30
1.38
0.32
1.38
6.69
1.04
117,696
8,006
1,308,813
7,927
10,355
96,987
(1,084)
34,155
(3,387)
144,953
$ 1,453,766
$ 454,320
$
163,630
43,870
16,319
314,542
27,066
139,736
33,524
1,193,007
11,132
99,826
12,220
1,305,053
16,334
8,263
75,799
(1,084)
25,943
(2,310)
122,945
$ 1,427,998
Net interest spread
Net interest income-margin
3.21
3.13
3.12
$
52,054
3.41%
$
44,297
3.27%
$
42,991
3.22%
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
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Rate Volume Calculation: 2018 vs. 2017
(Dollars in thousands)
Earning Assets
Loans
Commercial
Tax exempt
Real estate
Consumer
Investment securities:
Taxable
Tax-exempt
Interest-bearing deposits in banks
CDs with other banks
Total earning assets
Interest bearing liabilities
NOW
Money market checking
Savings
IRAs
CDs
Repurchase agreements and federal funds sold
FHLB and other borrowings
Subordinated debt
Total interest bearing liabilities
Total
Change in
Volume
Change in Rate
Change in Both
Rate & Volume
Total Change
4,631
(25)
976
(120)
514
645
19
3
4,022
4
1,139
(17)
342
224
27
4
550
—
67
3
66
78
10
—
9,203
(21)
2,182
(134)
922
947
56
7
6,643
5,745
774
13,162
(32)
40
(5)
16
788
(16)
948
(518)
1,221
5,422
678
620
(47)
48
1,003
(4)
1,038
42
3,378
2,367
(8)
14
3
4
219
1
583
(10)
806
(32)
638
674
(49)
68
2,010
(19)
2,569
(486)
5,405
7,757
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Rate Volume Calculation: 2017 vs. 2016
(Dollars in thousands)
Earning Assets
Loans
Commercial
Tax exempt
Real estate
Consumer
Investment securities:
Taxable
Tax-exempt
Interest-bearing deposits in banks
CDs with other banks
Total earning assets
Interest bearing liabilities
NOW
Money market checking
Savings
IRAs
CDs
Repurchase agreements and federal funds sold
FHLB and other borrowings
Subordinated debt
Total interest bearing liabilities
Total
Provision for Loan Losses
Change in
Volume
Change in Rate
Change in Both
Rate & Volume
Total Change
738
(44)
(1,057)
(149)
880
(154)
(72)
57
199
(86)
595
6
5
(623)
(9)
(137)
—
(249)
448
526
—
1,148
66
250
179
130
2
2,301
291
(65)
(15)
4
570
14
847
16
1,662
639
12
—
(73)
(12)
162
(15)
(100)
1
(25)
(10)
(31)
(1)
—
(94)
(2)
(106)
—
(244)
219
1,276
(44)
18
(95)
1,292
10
(42)
60
2,475
195
499
(10)
9
(147)
3
604
16
1,169
1,306
The Company’s provision for loan losses for 2018, 2017, and 2016 was $2.4 million, $2.2 million and $3.6 million, respectively.
Provision for loan losses of $2.4 million and $2.2 million were made for the year ended December 31, 2018 and 2017, respectively.
The slight increase in loan loss provision is most attributable to the growth in the loan portfolios in 2018. The total increase in
provision would have been greater if not for continued decline in historical loss rates, and a decrease in the need for ASC 310-10
specific loan loss allocations, during 2018. More specifically, total loan portfolio growth was 17.9% in 2018 versus 4.9% in 2017,
while total specific loan loss allocations for impaired loans decreased by $145 thousand in 2018, versus an increase of $645 thousand
in 2017. Total net charge-offs were $1.4 million in both 2018 and 2017, thereby generating roughly the same impact on the need for
provision in both years. 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.
Provision for loan losses of $2.2 million and $3.6 million were made for the year ended December 31, 2017 and 2016, respectively.
The increase in loan loss provision is most attributable to average historical loss rates that have declined substantially in 2017, while
net charge-offs were $1.1 million, or 45.0%, less in 2017 versus the prior year. The total decrease in provision would have been
greater if not for increased loan portfolio growth and increased ASC 310-10 specific loan loss allocations for impaired loans. More
specifically, total loan portfolio growth was 4.9% in 2017 versus 2.2% in 2016, while total specific loan loss allocations increased
by $645 thousand in 2017, versus a decrease of $269 thousand in 2016. 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.
Determining the appropriate level of the ALL requires considerable management judgment. In exercising this judgment, management
considers numerous internal and external factors including, but not limited to, portfolio growth, national and local economic
conditions, trends in the markets served and guidance from the Bank’s primary regulators. Management seeks to maintain an ALL
42
Table of Contents
that is appropriate in the circumstances and that complies with applicable accounting and regulatory standards. Further discussion
can be found earlier in this discussion under “Allowance for Loan Losses.”
Noninterest Income
Mortgage fee income, gain (loss) on derivatives, interchange income, security sale gains, income on bank owned life insurance and
portfolio loan sales generate the core of the Company’s noninterest income. Also, service charges on deposit accounts continue to
be part of the core of the Company’s noninterest income and include mainly non-sufficient funds and returned check fees, allowable
overdraft fees and service charges on commercial accounts. The total of noninterest income for 2018, 2017 and 2016 was $38.6
million, $40.7 million and $43.2 million, respectively.
The decrease in noninterest income for 2018 compared to 2017 was primarily the result of a $4.8 million decrease in mortgage fee
income, due to mortgage production volume decreasing by $93.8 million, or 6.1%, in 2018. Excluding the decrease in mortgage fee
income, noninterest income for 2018 increased $2.7 million and was primarily attributed to a decrease in the loss on derivative and
increases in the holding gain on equity securities and income on bank owned life insurance. Gain on sale of securities and gain on
sale of portfolio loans decreased $404 thousand and $340 thousand, respectively, in 2018 compared to 2017. During 2018, interchange
expense was netted against Visa debit card and interchange income and, as a result of this change, interchange income for 2018
declined by $611 thousand compared to 2017.
In 2018 and 2017, mortgage fee income decreased $4.8 million and increased $1.5 million, respectively. Production volume decreased
by $93.8 million, or 6.1%, in 2018 and decreased $103.8 million, or 6.3%, in 2017. With the pressure of increasing rates during
2018, production decreased in 2018 across each of the loan categories. The $93.8 million decrease in 2018 was due to a $46.9 million
decrease in purchase loans, a $35.4 million decrease in refinance volume, a $8.8 million decrease in bridge loans, and a $2.7 million
decrease in construction loans. The decrease in 2017 was due to the decrease in refinance volume of $199.3 million, which was a
result of increasing interest rates in 2017. This decrease was partially offset by a $68.8 million increase in construction loans, a $13.5
million increase in purchase loans, and a $13.2 million increase in bridge loans.
Commercial swap fee income increased $49 thousand from $503 thousand in 2017 to $552 thousand in 2018. This was primarily
the result of an increase in swap volume from $17.2 million in 2017 to $29.4 million in 2018.
Other operating income increased $61 thousand from $1.28 million in 2017 to $1.34 million in 2018. This increase was primarily
related to a gain on sale of fixed assets of $344 thousand related to the closure and sale of the land, building, and certain furniture
and equipment items from a branch located at 704 Foxcroft Avenue, Martinsburg, WV.
During the ordinary course of business in 2018, 2017 and 2016, the Company sold several investment securities at a gain of $327
thousand, $731 thousand and $1.1 million, respectively. All investments that were sold were classified as available-for-sale. The
Company is always looking at ways to improve yield while maintaining a high quality short-term investment portfolio.
Gain on sale of portfolio loans decreased $340 thousand from $538 thousand in 2017 to $198 thousand in 2018 and decreased $504
thousand from $1.0 million in 2016 to $538 thousand in 2017. The total volume of portfolio loans sold in 2018, 2017 and 2016 was
$15.2 million, $52.9 million, and $57.2 million, respectively.
The Company is continually searching for ways to increase noninterest income.
Noninterest Expense
Noninterest expense was $72.9 million, $70.5 million and $69.2 million in 2018, 2017 and 2016, respectively. Approximately 63%,
65% and 62% of noninterest expense for 2018, 2017 and 2016, respectively, related to personnel costs. Personnel is a critical
component of every service organization, which is why personnel costs are such a significant part of the expenditure mix. Salaries
and benefits increased by $2.1 million in 2018 and decreased by $1.1 million in 2017. The 2018 increase is primarily the result of
additional staffing related to organic growth. The additional staffing was used for sales positions as well as the back office support
needed to facilitate growth. The 2017 decrease is primarily the result of decreased commissions due to a 13.4% decrease in mortgage
loan origination volume, a $752 thousand decrease in the earn out paid to management of the mortgage company related to a 2012
acquisition, and due to operational efficiency gains during the year.
Equipment and occupancy expense increased by $384 thousand in 2018 and by $1.0 million in 2017. The 2018 increase was primarily
due to one new full-service branch being opened during 2018 in the northern Virginia region as well as a full year of expenses from
the Suncrest and Leesburg offices opened in 2017. Part of this increase was offset due to the decreased expenses related to the
43
Table of Contents
consolidation of two branches in Martinsburg, WV during December of 2017. The 2017 increase was mainly the result of the two
new full-service branches opened in 2017 and increased equipment expense related to depreciation and continued maintenance of
property and software.
Travel, entertainment, dues, and subscriptions expense increased by $587 thousand in 2018 and by $496 thousand in 2017. More
specifically, the 2018 increase was primarily due to a $386 thousand increase in travel expense, $288 thousand increase in publications
and sponsorships, and a $26 thousand increase in licenses and permits, partially offset by a $13 thousand decrease in meals and
entertainment, a $15 thousand decrease in cell phone reimbursement and a $27 thousand decrease in dues and memberships. The
2017 increase was primarily the result of a $144 thousand increase in publications and subscriptions, a $121 thousand increase in
meals and entertainment, a $96 thousand increase in travel expense, a $60 thousand increase in dues and memberships, and a $30
thousand increase in licenses and permits, partially offset by a $7 thousand decrease in cell phone reimbursement.
Professional fees increased by $416 thousand in 2018 and increased by $423 thousand in 2017. The 2018 increase was due to project
management, additional accounting and auditing fees, recruiting expenses, and other efficiency implementations. The 2017 increase
was related to project management, core conversion and other efficiency implementations, and the Nasdaq listing and subsequent
approval.
Data processing decreased by $1.4 million in 2018 and increased by $152 thousand in 2017. The decrease in 2018 was primarily
due to efficiencies gained by the core conversion completed during 2017. The increase in 2017 was largely driven by the core
conversion completed in April 2017, along with overall growth in terms of personnel and office space Company-wide and the usage
of additional products, services, and providers to better serve the client base.
Income Taxes
The Company incurred income tax expense of $3.4 million, $4.8 million, and $6.8 million in 2018, 2017, and 2016, respectively.
The Company’s effective tax rate was 22%, 39%, and 35% in 2018, 2017 and 2016, respectively. The decrease in effective tax rate
for 2018 was primarily driven by the Tax Reform Act, signed into law on December 22, 2017. The new law established a new, flat
corporate federal statutory income tax rate of 21%. The decrease in 2018 was even larger due to the increase during 2017. This
increase in effective tax rate during 2017 was also primarily the result of the Tax Reform Act, in which the Company was required
to re-measure its net deferred tax asset and resulted in an income tax charge of $646 thousand. Among other things, the new law (i)
eliminated the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any
taxable year, (ii) limited the deduction for net interest expense incurred by U.S. corporations, (iii) allowed businesses to immediately
expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (iv) eliminated or reduced certain
deductions related to meals and entertainment expenses, (v) modified the limitation on excessive employee remuneration to eliminate
the exception for performance-based compensation and clarifies the definition of a covered employee and (vi) limited the deductibility
of deposit insurance premiums. If not for having to re-measure the net deferred tax asset, the Company’s effective tax rate for 2017
would have been 33%. The Company’s effective tax rate is affected by certain permanent tax differences caused by statutory
requirements in the tax code. The largest permanent difference relates to tax-exempt interest income related to municipal investments
and loans held by the Company. Other, smaller permanent differences arise from income derived from life insurance purchased on
certain key employees and directors and meals and entertainment expenses.
Return on Assets
Excluding discontinued operations, the Company’s return on average assets from continuing operations was 0.73% in 2018, compared
to 0.52% in 2017 and 0.63% in 2016. The increased return in 2018 is a direct result of a $4.4 million increase in earnings from
continuing operations, while average total assets increased by $183.5 million, mainly as the result of a $121.6 million increase in
average total loans and a $44.7 million increase in investment securities. The decreased return in 2017 is a direct result of a $1.4
million decrease in earnings from continuing operations, while average total assets increased by $25.8 million, mainly as the result
of a $44.0 million increase in average investment securities.
Return on Equity
Excluding discontinued operations, the Company’s return on average stockholders’ equity from continuing operations was 7.46%
in 2018, compared to 5.23% in 2017 and 7.30% in 2016. The increased return in 2018 is a direct result of a $4.4 million increase in
earnings from continuing operations, while average equity increased by $15.9 million. The decreased return in 2017 is a direct result
of a $1.4 million decrease in earnings from continuing operations, while average equity increased by $22.0 million.
44
Table of Contents
Overview of the Statement of Condition
The greatest balance sheet changes from 2017 to 2018 were as follows: total assets increased by $216.7 million to $1.8 billion at
December 31, 2018, loans increased by $198.4 million to $1.3 billion, deposits increased by $149.6 million to $1.3 billion, repurchase
agreements decreased $7.5 million to $14.9 million, borrowings increased $62.7 million to $214.9 million, subordinated debt
decreased $16.0 million to $17.5 million, and stockholders’ equity increased $26.6 million to $176.8 million,
Cash and Cash Equivalents
Cash and cash equivalents totaled $22.2 million at December 31, 2018, compared to $20.3 million at December 31, 2017. During
2016, a deposit reclassification program was implemented and allowed the Company to reduce its requirement of reserve balances
on hand in accordance with the Federal Reserve Board the daily Federal Reserve Requirement.
Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and performance
needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands.
Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to
traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year.
These sources of funds should enable the Company to meet cash obligations as they come due.
Investment Securities
Investment securities available-for-sale totaled $221.6 million at December 31, 2018, compared to $231.5 million at December 31,
2017.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available for sale securities
are reported at estimated fair value:
December 31, (Dollars in thousands)
Available-for-sale securities:
U. S. Agency securities
U.S. Sponsored Mortgage-backed securities
Municipal securities
Other securities
Total investment securities available-for-sale
2018
2017
2016
$
$
77,430
$
80,945
$
50,115
83,761
10,308
58,154
75,842
16,566
28,816
54,733
70,795
8,024
221,614
$
231,507
$
162,368
At December 31, 2018, investment securities are available-for-sale or equity securities. Management believes the available-for-sale
classification provides flexibility in terms of managing the portfolio for liquidity, yield enhancement and interest rate risk management
opportunities. At December 31, 2018, the amortized cost of investment securities totaled $226.3 million, resulting in unrealized loss
in the investment portfolio of $4.6 million. Although these investments show an unrealized loss, management has the intent and
ability to hold the investments to maturity and they are all high quality investments with no other than temporary impairment. The
municipal securities continue to give the Company the ability to pledge and to better the effective tax rate.
45
(Dollars in
thousands)
U. S. Agency
securities
U.S. Sponsored
Mortgage-backed
securities
Municipal
securities
$
—
—
Table of Contents
The following table shows the maturities for the investment securities portfolio at December 31, 2018:
Within one year
After one year, but
within five
After five years, but
within ten
After ten years
Total investment
securities
Amortized
Cost
Weighted
Avg. Yield
Amortized
Cost
Weighted
Avg. Yield
Amortized
Cost
Weighted
Avg. Yield
Amortized
Cost
Weighted
Avg. Yield
Amortized
Cost
Fair
Value
—% $
34,851
1.96% $
14,328
2.55% $
29,863
2.86% $
79,042
$
77,430
—
—
11,066
5.54
2,481
—
3.35
6.00
9,377
3,073
9,958
1.68
2.74
5.69
42,777
68,126
2.61
3.31
—
52,154
50,115
84,746
83,761
10,308
10,308
Other securities
—
—
350
Total
$
11,066
5.54% $
37,682
2.09% $
36,736
3.19% $ 140,766
3.00% $ 226,250
$ 221,614
Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through the 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. Management believes the risk
characteristics inherent in the investment portfolio are acceptable based on these parameters.
Loans
The Company’s primary market areas are the Marion, Harrison, Jefferson, Berkeley, Monongalia, and Kanawha counties of West
Virginia and Fairfax and Loudoun counties of Virginia, with a secondary focus on the adjacent counties. The portfolio consists
principally of commercial lending, retail lending, which includes single-family residential mortgages and consumer lending. Loans
totaled $1.3 billion as of December 31, 2018 and $1.1 billion as of December 31, 2017.
During 2018, the Bank experienced loan growth of $198.4 million. The growth primarily came from the commercial and non-
residential real estate area, which grew approximately $157.1 million, and from the residential real estate area, which grew $45.3
million.
Major classification of loans held for investment at December 31, are as follows:
(Dollars in thousands)
2018
2017
2016
2015
2014
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total Loans
Deferred loan origination fees and costs, net
Loans receivable
$
$
$
$
941,033
$
783,909
$
756,619
$
728,202
$
353,944
9,605
308,614
12,783
1,304,582
$
1,105,306
(216) $
635
1,304,366
$
1,105,941
$
$
$
280,838
14,511
1,051,968
897
1,052,865
$
$
$
285,490
17,361
1,031,053
1,117
1,032,170
$
$
$
559,387
220,442
17,103
796,932
1,365
798,297
At December 31, 2018, commercial and non-residential real estate loans represented the largest portion of the portfolio approximating
72.1% of the total loan portfolio. Commercial loans totaled $941.0 million at December 31, 2018, compared to $783.9 million at
December 31, 2017. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while
maintaining appropriate underwriting standards and risk/price balance.
Residential real estate loans to retail customers (including home equity lines of credit) account for the second largest portion of the
loan portfolio, comprising 27.1% of the total loan portfolio. Residential real estate and home equity loans totaled $353.9 million at
December 31, 2018, compared to $308.6 million at December 31, 2017. Included in residential real estate loans are home equity
credit lines totaling $59.0 million at December 31, 2018, compared to $62.4 million at December 31, 2017. Management believes
the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residential real
estate lending continues to represent a primary focus due to the lower risk factors associated with this type of loan and the opportunity
to provide service to those in the Marion, Harrison, Berkeley, Jefferson, Kanawha and Monongalia county markets of West Virginia
and Fairfax and Loudoun county markets of Virginia. Under the Tax Reform Act signed into law on December 22, 2017, interest on
46
Table of Contents
home equity loans and lines of credit is no longer deductible. This change could adversely impact the level of originations and
outstanding volumes of home equity loans and lines of credit in the future.
At December 31, 2018, consumer and other loan balances totaled $9.6 million compared to $12.8 million at December 31, 2017.
The majority of consumer loans are in the direct lending area. Management is pleased with the performance and quality of the
consumer loan portfolio, which can be attributed to the many years of experience of its consumer lenders. This is another important
product necessary to serve our market areas.
At December 31, 2018, loans identified by management as potential problem loans amounted to $1.4 million, which includes one
commercial relationship comprised of two loans in total. These are loans where known information about the borrowers’ possible
credit problems causes management to have doubts as to the borrowers’ ability to comply with the loan repayment terms. However,
these loans continue to be repaid as agreed, are sufficiently collateralized, and are not believed to present significant risk of loss.
The following table provides additional information about loans:
Loan maturities at December 31, 2018:
(Dollars in thousands)
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total Loans
One Year
or Less
One Through
Five Years
Due After Five
Years
191,778
$
419,005
$
330,249
$
129,334
601
53,818
3,131
170,792
5,874
Total
941,032
353,944
9,606
321,713
$
475,954
$
506,915
$
1,304,582
$
$
The preceding data has been compiled based upon the earlier of either contractual maturity or next repricing date.
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2018 that mature after one year:
(Dollars in thousands)
Predetermined fixed interest rate
Floating or adjustable interest rate
Total as of December 31, 2018
Loan Concentration
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
$
$
383,130
366,124
749,254
$
$
22,063
202,547
224,610
$
$
3,789
5,216
9,005
$
$
Total
408,982
573,887
982,869
At December 31, 2018, commercial and non-residential real estate loans comprised the largest component of the loan portfolio.
However, a large portion of commercial loans are real estate secured and they are geographically and industry diverse. Loans that
are non-real estate secured are typically secured by accounts receivable, mortgages or equipment. While the loan concentration is
in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries
but primarily located in our market areas.
Allowance for Loan Losses
Management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan
Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the ALL. 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.
The result of the evaluation of the adequacy at each period presented herein indicated that the ALL was considered adequate to absorb
losses inherent in the loan portfolio.
At December 31, 2018 and 2017, impaired loans totaled $12.8 million and $15.6 million, respectively. A portion of the ALL of $1.0
million and $1.2 million was allocated to cover any loss in these loans at December 31, 2018 and 2017, respectively. Loans past due
more than 30 days were $16.2 million and $9.8 million, respectively, at December 31, 2018 and 2017. The total of loans past due
47
Table of Contents
more than 30 days as of December 31, 2018 included a loan with an outstanding balance of $6.0 million which was reported as past
due as the result of a temporary delay in the set-up and receipt of the initial payment. That loan was paid current shortly after year-
end.
Loans past due more than 30 days to gross loans
Loans past due more than 90 days to gross loans
December 31,
2018
2017
2016
1.24%
0.40%
0.89%
0.25%
0.73%
0.39%
Net charge-offs of $1.4 million in 2018, $1.4 million in 2017, and $2.5 million in 2016 were incurred. The provision for loan losses
was $2.4 million in 2018, $2.2 million in 2017, and $3.6 million in 2016. Net charge-offs represented 0.11%, 0.13%, 0.24%, 0.07%
and 0.16% in 2018, 2017, 2016, 2015 and 2014, respectively, compared to gross loans for the indicated period.
The following tables reflect the allocation of the ALL as of December 31, 2018, 2017, 2016, 2015 and 2014:
(Dollars in thousands)
ALL balance at December 31, 2017
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2018
(Dollars in thousands)
ALL balance at December 31, 2016
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2017
(Dollars in thousands)
ALL balance at December 31, 2015
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2016
(Dollars in thousands)
ALL balance at December 31, 2014
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2015
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
7,804
$
1,824
$
(1,024)
15
1,810
(166)
81
350
8,605
$
2,089
$
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
7,181
$
1,718
$
(1,138)
39
1,722
(250)
44
312
7,804
$
1,824
$
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
6,066
$
1,810
$
(1,995)
8
3,102
(224)
11
121
7,181
$
1,718
$
Consumer and
Other
Total
250
$
(290)
5
280
245
$
Consumer and
Other
Total
202
$
(109)
18
139
250
$
Consumer and
Other
Total
130
$
(338)
1
409
202
$
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
4,363
$
1,653
$
207
$
(708)
20
2,391
(33)
6
184
(6)
11
(82)
6,066
$
1,810
$
130
$
$
$
$
$
$
$
$
$
9,878
(1,480)
101
2,440
10,939
9,101
(1,497)
101
2,173
9,878
8,006
(2,557)
20
3,632
9,101
6,223
(747)
37
2,493
8,006
48
Table of Contents
(Dollars in thousands)
ALL balance at December 31, 2013
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2014
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
3,609
$
1,073
$
253
$
(1,110)
7
1,857
(130)
3
707
(68)
4
18
4,363
$
1,653
$
207
$
$
$
4,935
(1,308)
14
2,582
6,223
(Dollars in thousands)
2018
2017
2016
2015
2014
December 31,
Amount
% of
loans in
each
category
to total
loans
Amount
% of
loans in
each
category
to total
loans
Amount
% of
loans in
each
category
to total
loans
Amount
% of
loans in
each
category
to total
loans
Amount
% of
loans in
each
category
to total
loans
Commercial and non-
residential real estate
Residential real estate and
home equity
Consumer and other
$ 8,605
72% $ 7,804
71% $ 7,181
72% $ 6,066
70% $ 4,363
70%
2,089
245
27
1
1,824
250
28
1
1,718
202
27
1
1,810
130
28
2
1,653
207
28
2
Total
$ 10,939
100% $ 9,878
100% $ 9,101
100% $ 8,006
100% $ 6,223
100%
Non-performing assets consist of loans that are no longer accruing interest, loans that have been renegotiated to below market rates
based upon financial difficulties of the borrower, and real estate acquired through foreclosure. When interest accruals are suspended,
accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as
a credit loss. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes
and collectability is no longer in doubt, which is evident by the receipt of six consecutive months of regular, on-time payments, the
loan is eligible to be returned to accrual status. For 2018, interest income on loans would have increased by approximately $771
thousand if loans had performed in accordance with their terms.
Non-performing assets and past due loans:
(Dollars in thousands)
Non-accrual loans
Commercial
Real estate and home equity
Consumer and other
Total non-accrual loans
Accruing loan past due 90 days or more
Total non-performing loans
Other real estate, net
Total non-performing assets
Allowance for loan losses
2018
2017
2016
2015
2014
$
$
$
4,495
2,526
82
7,103
—
7,103
2,145
9,248
10,939
$
$
$
8,350
1,170
179
9,699
—
9,699
1,346
11,045
9,878
$
$
$
4,975
1,176
78
6,229
—
6,229
414
6,643
9,101
$
8,195
$
3,462
839
371
9,405
848
10,253
239
10,492
8,006
$
$
$
$
487
—
3,949
5,306
9,255
575
9,830
6,223
Nonperforming loans to gross loans
0.54%
0.88%
0.59%
Allowance for loan losses to non-performing loans
154.01%
101.85%
146.11%
Nonperforming assets to total assets
0.53%
0.72%
0.47%
0.99%
78.08%
0.76%
1.16%
67.24%
0.89%
Impaired loans have decreased by $2.8 million, or 17.9%, during 2018. This change is the net effect of multiple factors, including
the identification of $5.6 million of recently impaired loans, the sale of three impaired commercial loans totaling $5.4 million,
principal curtailments of $738 thousand, partial charge-offs of $708 thousand, foreclosure and reclassification to other real estate
49
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owned of $720 thousand, reclassification of $620 thousand of previously reported impaired loans to performing loans, and normal
loan amortization of $153 thousand.
The $5.6 million total of recently identified impaired loans includes $3.7 million, or 66.1%, of commercial loans, $1.6 million, or
18.6%, of residential mortgage loans, and $213 thousand, or 5.3%, of consumer loans. The commercial loans are primarily concentrated
in two relationships, including a $1.8 million note secured by a stalled real estate development project and two notes totaling $1.4
million secured by a struggling automotive dealership. These three loans represent 86.5% of the recently impaired commercial loans,
while the remaining $500 thousand represent six additional commercial loans ranging from $11 thousand to $152 thousand in
outstanding balances.
The $5.4 million total of sold impaired loans includes three loans in two commercial relationships, including a $3.4 million purchased
participation note secured by a senior healthcare facility, a $1.1 million commercial real estate loan, net of a $579 thousand sold
participation, secured by a retail strip center, and a $874 thousand development loan secured by a developed commercial site adjacent
to the retail strip center. The healthcare loan was purchased by another investor with significant resources in the healthcare industry,
while the retail and development loans were purchased by an investor with personal ties to the project.
Funding Sources
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 $1.3 billion, or
84.1%, of funding sources at December 31, 2018. This same information at December 31, 2017, reflected $1.2 billion in deposits
representing 84.8% of such funding sources. Repurchase agreements, which are available to large corporate customers, represented
1.0% and 1.6% of funding sources at December 31, 2018 and 2017, respectively. FHLB and other borrowings and subordinated debt
represented the remainder of such funding sources. In 2018, $16.0 million of subordinated debt was converted into common stock,
which caused the issuance of 1,000,000 new shares and will provide an annual interest expense savings of $1.1 million.
Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the
Company. At December 31, 2018, noninterest-bearing balances totaled $213.6 million compared to $126.0 million at December 31,
2017, or 16.3% and 10.9% of total deposits, respectively. Interest-bearing deposits totaled $1.1 billion at December 31, 2018, compared
to $1.0 billion at December 31, 2017, or 83.7% and 89.1% of total deposits, respectively.
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2018, 2017 and 2016:
(Dollars in thousands)
2018
2017
2016
Demand deposits of individuals, partnerships, and corporations
Noninterest bearing demand
Interest bearing demand
Savings and money markets
Time deposits including CDs and IRAs
Total deposits
Time deposits that meet or exceed the FDIC insurance limit
$
213,597
$
125,963
$
376,398
317,697
401,462
436,303
284,795
312,519
115,692
414,031
280,533
296,761
$
$
1,309,154
$
1,159,580
$
1,107,017
15,280
$
18,832
$
18,727
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The following table sets forth the average balance and average rate paid on each of the deposit categories for the years ended
December 31, 2018, 2017 and 2016:
(Dollars in thousands)
Average
Balance
Average Rate
Average
Balance
Average Rate
Average
Balance
Average Rate
Noninterest bearing demand deposits
$
171,631
$
117,696
$
99,826
2018
2017
2016
Interest-bearing demand deposits:
NOW
Money market checking
Savings
IRAs
CDs
Total interest-bearing deposits
432,789
245,008
44,049
17,894
319,720
1,059,460
0.75%
1.00%
0.07%
1.59%
1.76%
1.10%
438,123
239,632
47,034
16,678
262,417
1,003,884
0.60%
0.74%
0.17%
1.30%
1.38%
0.83%
454,320
163,630
43,870
16,319
314,542
992,681
0.53%
0.78%
0.20%
1.27%
1.19%
0.78%
Total deposits
$ 1,231,091
$ 1,121,580
$ 1,092,507
Average interest-bearing deposits totaled $1.1 billion during 2018 compared to $1.0 billion during 2017. Average noninterest bearing
deposits totaled $171.6 million during 2018 compared to $117.7 million during 2017.
Maturities of time deposits that meet or exceed the FDIC insurance limit as of December 31, 2018:
(Dollars in thousands)
Under 3 months
Over 3-12 months
Over 1 to 3 years
Over 3 years
Total
2018
1,752
6,677
5,791
1,060
15,280
$
$
Along with traditional deposits, the Bank has access to both short-term borrowings from FHLB and overnight repurchase agreements
to fund its operations and investments.
Short-term borrowings:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
Repurchase agreements:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
2018
2017
2016
$
212,395
$
149,596
$
171,117
264,297
2.27%
2.62%
100,969
220,097
1.16%
1.61%
87,733
137,822
210,600
0.51%
0.74%
$
2018
2017
2016
$
14,925
18,536
20,903
0.30%
0.16%
$
22,403
25,160
25,972
0.30%
0.34%
25,160
27,066
29,561
0.27%
0.28%
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In addition, the Company holds subordinated debt as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
Capital/Stockholders’ Equity
$
2018
2017
2016
$
17,524
25,774
33,524
6.81%
6.57%
$
33,524
33,524
33,524
6.69%
6.70%
33,524
33,524
33,524
6.64%
6.63%
During the year ended December 31, 2018, stockholders’ equity increased approximately $26.6 million to $176.8 million. This
increase consists of net income for the year of $12.0 million, the conversion of subordinated debt to common stock totaling $16.0
million, common stock options exercised totaling $2.1 million, and stock based compensation of $1.3 million. These increases were
offset by a $3.1 million other comprehensive loss and dividends paid totaling $1.7 million. With the stockholders’ equity increasing
as noted above, the equity to assets ratio increased 0.31% to 10.10% due to equity growth outpacing the $216.7 million increase in
total assets during 2018. The Company paid dividends to common shareholders of $1.2 million in 2018 and $1.0 million in 2017
and earned $12.0 million in 2018 versus $7.6 million in 2017, resulting in the dividend payout ratio decreasing from 13.64% in 2017
to 10.16% in 2018.
At December 31, 2018, accumulated other comprehensive loss totaled $6.8 million, an increase in the loss of $3.8 million from
December 31, 2017. This change is primarily the result of the decrease in the market value of the investment portfolio from 2017 to
2018, principally in the area of local municipal bonds.
The Company and the Bank are also subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital
adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts
and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios
reflect the relative risks of various assets companies hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%,
100% or 150% (highest risk assets) is assigned to each asset on the balance sheet. Detailed information concerning the Company’s
risk-based capital ratios can be found in Note 14, “Regulatory Capital Requirements” of the Notes to the Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. See also
“Supervision and Regulation” in Item 1, Business, of this Annual Report on Form 10-K.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and
ratios of Total capital, Tier 1 capital and Tier 1 common equity to risk-weighted assets, and of Tier 1 capital to average assets, as
defined. As of December 31, 2018 and 2017, the Company met all capital adequacy requirements to which it was subject.
At December 31, 2018, the Company’s consolidated risk-based capital ratios were above the minimum standards for a well capitalized
institution. The total risk-based capital ratio of 13.8% at December 31, 2018, is above the well capitalized standard of 10%. The Tier
1 risk-based capital ratio of 12.0% also exceeded the well capitalized minimum of 8%. The common equity tier 1 capital ratio of
11.2% is above the well capitalized standard of 6.5%. The leverage ratio at December 31, 2018, was 9.9% and was also above the
well capitalized standard of 5%. Management believes that capital continues to provide a strong base for profitable growth.
Liquidity and Interest Rate Sensitivity
The objective of the asset/liability management function is to structure the balance sheet in ways that maintain consistent growth in
net interest income and minimize exposure to market risks within its policy guidelines. This objective is accomplished through
management of balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels,
and customer preferences. The Company manages balance sheet liquidity through the investment portfolio, sales of commercial and
residential real estate loans, and through the utilization of diversified funding sources, including retail deposits, a variety of wholesale
funding sources and borrowings through the FHLB. Interest rate risk is managed through the use of interest rate caps, commercial
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loan swap transactions and interest rate lock commitments on mortgage loans held for sale, as well as the structuring of loan terms
that provide cash flows to be consistently re-invested along the rate cycle.
Interest Rate Risk
Our primary market risk is interest rate fluctuation. Interest rate risk results from the traditional banking activities in which the Bank
engages, such as gathering deposits and extending loans. Many factors, including economic conditions, financial conditions,
movements in interest rates, and consumer preferences affect the difference between interest earned on our assets and interest paid
on our liabilities. The Company’s interest rate risk represents the levels of exposure our income and market values have to fluctuations
in interest rates. Interest rate risk is measured as the change in earnings and the theoretical market value of equity that results from
changes in interest rates. The ALCO oversees the management of interest rate risk. ALCO’s objective is to maximize stockholder
value, enhance profitability and increase capital, serve customer and community needs, and protect the Company from any material
financial consequences associated with changes in interest rates.
Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from
changing rate relationships across yield curves that affect bank activities (basis risk); from changing rate relationships across the
spectrum of maturities (yield curve risk); and from interest rate related options embedded in certain bank products (option risk).
Changes in interest rates may also affect a bank’s underlying economic value. The values of a bank’s assets, liabilities, and interest-
rate related, off-balance sheet contracts are affected by changes in rates because the present values of future cash flows, and in some
cases the cash flows themselves, are changed when discounting by different rates.
The Company believes that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management
and the Board have chosen an interest rate risk profile that is consistent with our strategic business plan.
The Company’s Board of Directors has established a comprehensive interest rate risk management policy, which is administered by
our ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a
measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk)
resulting from a hypothetical change in interest rates. The Company measures the potential adverse impacts that changing interest
rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of
computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors embedded
in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent
in the interest rate modeling methodology we employ. When interest rates change, actual movements in different categories of interest-
earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly
from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on
adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.
A base case forecast is prepared using Global Insight’s Most Likely rate forecast and alternative simulations reflecting more and less
extreme behavior of rates each quarter. The analysis gets presented to the ALCO and the Board of Directors. In addition, more
frequent forecasts are produced when interest rates are particularly uncertain, when other business conditions so dictate, or when
necessary to model potential balance sheet changes.
The balance sheet is subject to quarterly testing for interest rate shock possibilities to indicate the inherent interest rate risk. Average
interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”). The goal is to structure the balance sheet so that net
interest-earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the
various interest rate shock levels.
At December 31, 2018, the Company is shown in a liability sensitive position for the first year after rate shocks. Management
continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their
repricing. An asset sensitive position, theoretically, is more favorable in a rising rate environment since more assets than liabilities
will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining
interest rate environment since more liabilities than assets will reprice in a given time frame as interest rates decline. Management
works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of
interest rates.
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Estimated Changes in Net Interest Income
Change in interest rates
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
December 31, 2018
December 31, 2017
25.0 %
0.8 %
(4.3)%
20.0 %
0.3 %
(3.9)%
15.0 %
(0.7)%
(3.2)%
10.0 %
(0.7)%
(1.6)%
10.0 %
(2.9)%
(0.3)%
15.0 %
(8.2)%
(11.6)%
20.0 %
(16.9)%
(19.2)%
25.0 %
(21.6)%
(22.8)%
As shown above, measures of net interest income at risk in a rising rate environment were less favorable at December 31, 2018 than
at December 31, 2017 at all interest rate shock levels and less favorable in a falling rate environment for the same time periods. All
measures remained well within prescribed policy limits. This reflects rising liability costs in an environment in which we expect
short-term market rates to rise faster than long-term rates.
The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in
interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and
liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in
theory, approximates the fair value of the Company’s net assets.
Estimated Changes in Economic Value of Equity (EVE)
Change in interest rates
+300 bp
+400 bp
+200 bp
+100 bp
-100 bp
-200 bp
-300 bp
-400 bp
Policy Limit
December 31, 2018
December 31, 2017
35.0 %
(8.2)%
(6.3)%
25.0 %
(6.4)%
(4.7)%
17.0 %
(4.3)%
(3.2)%
12.0 %
(2.0)%
(1.7)%
12.0 %
(2.7)%
(1.9)%
17.0 %
(11.9)%
(16.1)%
25.0 %
(27.6)%
(29.7)%
35.0 %
(33.3)%
(29.7)%
The EVE at risk in down rate scenarios decreased at December 31, 2018, when compared to December 31, 2017, while we expect
economic value of equity to decline during rising rate environments. This is due to operating in an environment expecting a relatively
flattening yield curve.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes have been prepared in accordance with GAAP, which generally requires the
measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates
have a greater impact on performance than the effects of inflation.
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 the Company’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 year ended
December 31, 2018, cash provided by financing activities totaled $205.2 million, while outflows from investing activity totaled
$210.0 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.
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Contractual Obligations
The following table reflects the contractual maturities of our term liabilities as of December 31, 2018. The amounts shown do not
reflect contractual interest, early withdrawal or prepayment assumptions.
(Dollars in thousands)
Certificates of deposit and individual retirement accounts 1
Securities sold under agreement to repurchase
Operating leases
FHLB short-term advances
FHLB long-term advances
Less than one
year
One to three
years
Three to five
years
More than
five years
Total
$
266,714
$
98,370
$
36,378
$
— $
401,462
14,925
1,785
212,395
85
—
3,316
—
2,407
—
3,055
—
—
—
12,817
—
—
14,925
20,973
212,395
2,492
Total
495,904
1 Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount
depends on the remaining time to maturity at the time of early withdrawal.
104,093
652,247
39,433
12,817
$
$
$
$
$
Off-Balance Sheet Arrangements
The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on
the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into
agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the
Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits. Further discussion of these agreements,
including the amounts outstanding at December 31, 2018, is included in Note 7, “Commitments and Contingent Liabilities” of the
Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not
necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
Fourth Quarter
Fourth quarter 2018 net income was $3.0 million compared to $1.4 million in the fourth quarter of 2017. This equated to basic
earnings per share, on a quarterly basis, of $0.25 in 2018 and $0.12 in 2017. Diluted earnings per share for the fourth quarter of 2018
and 2017 were $0.24 and $0.12, respectively. Net interest income increased during the fourth quarter and was $14.4 million in the
fourth quarter of 2018 compared to $11.7 million in 2017. Noninterest income was $8.3 million in the fourth quarter of 2018 compared
to $10.2 million in 2017. Noninterest expense increased to $18.5 million for the fourth quarter of 2018 from $17.7 million in 2017.
Loan loss provision was $292 thousand for the fourth quarter of 2018, a decrease of $744 thousand over the fourth quarter of 2017.
The commercial and retail banking segment of the Company had increased earnings in the fourth quarter of 2018 by $2.4 million
from the same period one year prior due to an increase in noninterest expenses. Net interest income increased $2.5 million due to
the Company’s strong balance sheet growth, namely loan growth of $203.0 million and deposit growth of $147.1 million. Noninterest
income decreased $387 thousand, primarily as the result of a decrease of $80 thousand in the gain on sale of portfolio loans, a decrease
of $54 thousand in the gain on derivative, and a decrease of $47 thousand in commercial swap fee income. Noninterest expenses
increased by $1.0 million, mostly as the result of a $743 thousand increase in salaries and employee benefits, a $218 thousand increase
in other operating expenses, and $111 thousand increase in insurance, tax, and assessment expense.
Additionally, fourth quarter 2018 income tax expense decreased by $556 thousand to $1.3 million versus the fourth quarter 2017.
The decrease in tax expense was primarily the result of the reduction in the statutory income tax rate in 2018.
The mortgage segment of the Company had decreased fourth quarter earnings of $320 thousand from the same period one year prior
due to a decrease in mortgage fee income of $837 thousand and a decrease in the gain on derivatives of $227 thousand. Salaries and
benefits decreased $689 thousand as a result of decreased commission expense. In addition, there was a decrease in income tax
expense of $232 thousand due to the decrease in fourth quarter 2018 earnings versus the prior year.
The financial holding company segment of the Company had decreased earnings of $452 thousand in the fourth quarter of 2018
compared to the same period in 2017. The earnings decrease was primarily related to a $276 thousand decrease in the gain on sale
of securities and a $584 thousand increase in salaries and employee benefits. Additionally, the fourth quarter income tax benefit
decreased $62 thousand in 2018.
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Future Outlook
The Company has invested in 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 high 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s market risk is composed primarily of interest rate risk. The 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, 2018. 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, 2018, over a twelve-month period, an immediate 100 basis point increase in interest rates would
result in a decrease in net interest income by 0.7%. An immediate 200 basis point increase in interest rates would result in a decrease
in net interest income by 0.7%. A 100 basis point decrease in interest rates would result in a decrease in net interest income of 2.9%.
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
meets quarterly and has responsibility for formulating and implementing strategies to improve balance sheet positioning and reviewing
interest rate sensitivity.
We also have counter-party risk which may arise from the possible inability of the Company’s 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. We do not expect any third-party investor to fail to meet its
obligation. We monitor the financial condition of these third parties on an annual basis.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MVB Financial Corp. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands except per share data)
December 31, 2018 and 2017
ASSETS
Cash and cash equivalents:
Cash and due from banks
Interest bearing balances with banks
Total cash and cash equivalents
Certificates of deposit with other banks
Investment Securities:
Securities available-for-sale, at fair value
Equity securities
Loans held for sale
Loans receivable:
Less: Allowance for loan losses
Net Loans
Premises and equipment, net
Bank owned life insurance
Accrued interest receivable and other assets
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Accrued interest payable and other liabilities
Repurchase agreements
FHLB and other borrowings
Subordinated debt
Total liabilities
STOCKHOLDERS’ EQUITY
2018
2017
$
14,747
$
7,474
22,221
14,778
221,614
9,599
75,807
16,345
3,960
20,305
14,778
231,507
—
66,794
1,304,366
1,105,941
(10,939)
(9,878)
1,293,427
1,096,063
26,545
34,291
34,207
18,480
26,686
32,666
27,023
18,480
$
1,750,969
$
1,534,302
$
213,597
$
125,963
1,095,557
1,309,154
1,033,617
1,159,580
17,706
14,925
214,887
17,524
16,434
22,403
152,169
33,524
1,574,196
1,384,110
Preferred stock, par value $1,000; 20,000 authorized; 783 issued in 2018 and 2017 (See Note 12)
7,834
7,834
Common stock, par value $1; 20,000,000 shares authorized; 11,658,370 shares issued and 11,607,293 shares
outstanding in 2018; 10,495,704 shares issued and 10,444,627 shares outstanding in 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury Stock, 51,077 shares, at cost
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
11,658
116,897
48,274
(6,806)
(1,084)
10,496
98,698
37,236
(2,988)
(1,084)
176,773
150,192
$
1,750,969
$
1,534,302
See Notes to Consolidated Financial Statements
58
Table of Contents
MVB Financial Corp. and Subsidiary
Consolidated Statements of Income
(Dollars in thousands except per share data)
Years ended December 31, 2018, 2017 and 2016
INTEREST INCOME
Interest and fees on loans
Interest on deposits with other banks
Interest on investment securities - taxable
Interest on tax exempt loans and securities
Total interest income
INTEREST EXPENSE
Interest on deposits
Interest on repurchase agreements
Interest on FHLB and other borrowings
Interest on subordinated debt
Total interest expense
NET INTEREST INCOME
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Service charges on deposit accounts
Income on bank owned life insurance
Visa debit card and interchange income
Mortgage fee income
Gain on sale of portfolio loans
Insurance and investment services income
Gain on sale of securities
Gain (loss) on derivatives
Commercial swap fee income
Holding gain on equity securities
Other operating income
Total noninterest income
NONINTEREST EXPENSES
Salary and employee benefits
Occupancy expense
Equipment depreciation and maintenance
Data processing and communications
Mortgage processing
Marketing, contributions and sponsorships
Professional fees
Printing, postage and supplies
Insurance, tax and assessment expense
Travel, entertainment, dues and subscriptions
Other operating expenses
Total noninterest expense
Income from continuing operations, before income taxes
Income tax expense - continuing operations
Net Income from continuing operations
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
Net Income from discontinued operations
Net Income
Preferred dividends
Net Income available to common shareholders
59
2018
2017
2016
$
$
$
62,468
403
3,580
3,309
69,760
11,635
56
4,259
1,756
17,706
52,054
2,440
49,614
1,033
1,182
647
32,337
198
716
327
(278)
552
590
1,336
38,640
46,224
4,234
3,239
3,741
3,551
1,141
3,559
762
1,846
2,808
1,773
72,878
15,376
3,373
12,003
—
—
—
12,003
489
11,514
$
$
$
51,217
340
2,658
2,383
56,598
8,294
75
1,690
2,242
12,301
44,297
2,173
42,124
765
646
1,258
37,149
538
563
731
(2,722)
503
—
1,275
40,706
44,108
4,084
3,005
5,116
3,207
1,179
3,143
988
1,797
2,221
1,652
70,500
12,330
4,755
7,575
—
—
—
7,575
498
7,077
$
$
$
50,018
322
1,366
2,417
54,123
7,748
72
1,086
2,226
11,132
42,991
3,632
39,359
764
638
1,185
35,673
1,042
420
1,082
1,467
84
—
850
43,205
45,225
3,686
2,452
4,964
3,355
1,253
2,720
767
1,528
1,725
1,534
69,209
13,355
4,378
8,977
6,346
2,411
3,935
12,912
1,128
11,784
Table of Contents
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per common shareholder - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per common shareholder - diluted
Cash dividends declared
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
$
$
$
$
$
$
$
1.04
$
— $
$
1.04
0.69
$
— $
$
0.69
1.00
$
— $
$
1.00
0.68
$
— $
$
0.68
0.96
0.48
1.44
0.92
0.39
1.31
0.11
11,030,984
12,722,003
$
0.10
10,308,738
10,440,228
$
0.08
8,212,021
10,068,733
See Notes to Consolidated Financial Statements
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Table of Contents
MVB Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years ended December 31, 2018, 2017 and 2016
Net Income
Other comprehensive income (loss):
2018
2017
2016
$
12,003
$
7,575
$
12,912
Unrealized holding gains (losses) on securities available-for-sale
(4,167)
3,387
(2,802)
Unrealized holding gains during the year related to reclassified held-to-maturity securities
—
—
1,825
Income tax effect
1,125
(1,355)
391
Reclassification adjustment for gain recognized in income
(327)
(731)
(813)
Reclassification adjustment for gain recognized in income related to reclassified held-to-maturity securities
Income tax effect
—
88
—
(269)
292
433
Change in defined benefit pension plan
284
(507)
(181)
Income tax effect
(77)
203
72
Total other comprehensive income (loss)
(3,074)
1,289
(1,344)
Comprehensive income
$
8,929
$
8,864
$
11,568
See Notes to Consolidated Financial Statements
61
Table of Contents
MVB Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands except per share data)
Years ended December 31, 2018, 2017 and 2016
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Treasury
Stock
Total
Stockholders’
Equity
Balance December 31, 2015
$
16,334
$
8,113
$
74,228
$
20,054
$
(2,933) $
(1,084) $
114,712
Net Income
Other comprehensive loss
Cash dividends paid ($0.08 per share)
Dividends on preferred stock
Common stock issuance, net of
issuance costs
Stock based compensation
Common stock options exercised
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,913
18,606
—
22
568
10
12,912
—
(646)
(1,128)
—
—
—
—
(1,344)
—
—
—
—
—
—
—
—
—
—
—
—
12,912
(1,344)
(646)
(1,128)
20,519
568
32
Balance December 31, 2016
16,334
10,048
93,412
31,192
(4,277)
(1,084)
145,625
Net Income
Other comprehensive income
Cash dividends paid ($0.10 per share)
Dividends on preferred stock
—
—
—
—
Redemption of preferred stock
(8,500)
Common stock issuance, net of
issuance costs
Stock based compensation
Common stock options exercised
—
—
—
—
—
—
—
—
444
—
4
—
—
—
—
—
4,487
813
(14)
7,575
—
(1,033)
(498)
—
—
—
—
—
1,289
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,575
1,289
(1,033)
(498)
(8,500)
4,931
813
(10)
Balance December 31, 2017
7,834
10,496
98,698
37,236
(2,988)
(1,084)
150,192
Net Income
Other comprehensive loss
Cash dividends paid ($0.11 per share)
Dividends on preferred stock
Stock based compensation
Common stock options exercised
Restricted stock units vested
Stranded AOCI
Mark to Market on equity positions
held at December 31, 2017
Common stock issued from
subordinated debt conversion, net of
costs
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
161
1
—
—
—
—
—
—
1,267
1,968
(1)
—
—
1,000
14,965
12,003
—
(1,220)
(489)
—
—
—
646
98
—
—
(3,074)
—
—
—
—
—
(646)
(98)
—
—
—
—
—
—
—
—
—
—
—
12,003
(3,074)
(1,220)
(489)
1,267
2,129
—
—
—
15,965
Balance December 31, 2018
$
7,834
$
11,658
116,897
48,274
$
(6,806) $
(1,084) $
176,773
See Notes to Consolidated Financial Statements
62
Table of Contents
MVB Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2018, 2017 and 2016
OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization and accretion of investments
Net amortization of deferred loan (fees) costs
Provision for loan losses
Depreciation and amortization
Stock based compensation
Loans originated for sale
Proceeds of loans sold
Mortgage fee income
Gain on sale of securities
Loss on sale of securities
Net gain on equity securities
Gain on sale of portfolio loans
Gain on sale of subsidiary
Income on bank owned life insurance, including death benefit proceeds in excess of cash surrender value
Deferred taxes
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale
Maturities/paydowns of investment securities available-for-sale
Maturities/paydowns of investment securities held-to-maturity
Sales of investment securities available-for-sale
Purchases of premises and equipment
Disposals of premises and equipment
Disposals of premises and equipment from sale of subsidiary
Net increase in loans
Purchases of restricted bank stock
Redemptions of restricted bank stock
Proceeds from sale of certificates of deposit with banks
Purchases of certificates of deposit with banks
Proceeds from sale of other real estate owned
Proceeds from sale of subsidiary
Purchase of bank owned life insurance
Proceeds from death benefit of bank owned life insurance policies
Purchase of equity securities
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in deposits
Net (decrease) in repurchase agreements
Net change in short-term FHLB borrowings
Principal payments on FHLB borrowings
Proceeds from new FHLB borrowings
Subordinated debt conversion costs
Proceeds from stock offering, net of issuance costs
Preferred stock redemption
Common stock options exercised
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Loans transferred to other real estate owned
Cashless stock options exercised
Restricted stock units vested
Common stock converted from subordinated debt
Cash payments for:
Interest on deposits, repurchase agreements and borrowings
Income taxes
2018
2017
2016
$
12,003
$
7,575
$
12,912
1,293
(324)
2,440
2,938
1,267
(1,214,078)
1,237,402
(32,337)
(352)
25
(590)
(198)
—
(1,182)
139
(1,752)
6,694
(31,068)
25,748
—
2,743
(2,693)
—
—
(199,282)
(29,370)
25,681
—
—
707
—
(1,149)
706
(2,000)
(209,977)
149,574
(7,478)
74,999
(62,281)
50,000
(35)
—
—
2,129
(1,220)
(489)
205,199
1,916
20,305
22,221
1,369
161
1
16
17,277
191
$
$
$
1,166
26
2,173
2,691
813
(1,367,531)
1,428,060
(37,149)
(1,103)
372
—
(538)
—
(646)
1,349
(4,137)
33,121
(139,127)
19,011
—
53,198
(4,496)
307
—
(53,960)
(20,712)
18,980
1,978
(2,229)
—
—
(9,050)
—
—
(136,100)
52,563
(2,757)
49,663
(15,097)
26,682
—
4,931
(8,500)
(10)
(1,033)
(498)
105,944
2,965
17,340
20,305
1,164
4
—
—
12,399
6,026
$
$
$
1,001
55
3,632
3,407
568
(1,643,450)
1,691,572
(35,673)
(1,084)
2
—
(1,042)
(6,926)
(638)
707
221
25,264
(114,612)
17,790
400
55,191
(1,668)
—
581
(22,245)
(23,933)
26,684
6,717
(8,094)
159
7,047
—
—
—
(55,983)
94,703
(2,277)
(92,184)
(93)
—
—
20,519
—
32
(646)
(1,128)
18,926
(11,793)
29,133
17,340
332
16
—
—
10,890
6,922
$
$
$
See Notes to Consolidated Financial Statements
63
Table of Contents
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through
its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB
Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).
MVB Bank was chartered in 1997 and commenced operations in 1999.
In 2012, MVB Bank acquired Potomac Mortgage Group, Inc. (“PMG” which began doing business under the registered trade name
“MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services
company, Lender Service Provider, LLC (“LSP”). In 2013, this fifty percent interest (50%) in LSP was reduced to a twenty-five
percent (25%) interest and 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. In 2016, the
Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI purchased substantially all
of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million and was reported in
discontinued operations. MVB Insurance retained the assets related to, and 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.
A summary of significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial
statements follows:
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company, its subsidiary, MVB Bank, and the Bank’s wholly-
owned subsidiaries, MVB Mortgage and MVB Insurance. These statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). All significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, derivative
instruments, goodwill and deferred tax assets and liabilities.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs
expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource
allocation and performance. While the Company’s chief decision makers monitor the revenue streams of the various Company’s
products and services, operations are managed and financial performance is evaluated on a Company-wide basis. The Company has
identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Insurance
services was previously identified as a reportable segment until entering into an Asset Purchase Agreement, as discussed below and
in Note 22, “Discontinued Operations” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements
and Supplementary Data, of this Annual Report on Form 10-K.
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Cash and Cash Equivalents
Cash equivalents include cash on hand, deposits in banks and interest-earning deposits. Interest-earning deposits with original
maturities of 90 days or less are considered cash equivalents. Net cash flows are reported for loans, deposits and short term borrowing
transactions.
Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Estimates, such as the allowance for loan losses, are based
upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual
results could differ from these estimates.
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
Held-to-Maturity Securities - Includes securities that the Company has the positive intent and ability to hold to maturity. These
securities are reported at amortized cost.
Available-for-Sale Securities - Includes debt that will be held for indefinite periods of time. These securities may be sold in
response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative
investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported
as a separate component of stockholders’ equity, net of estimated income tax effect.
Equity Securities - Includes equity securities that are adjusted to fair value on a monthly basis, with the change in value recorded
directly on the income statement.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed
by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific
identification of the adjusted cost of each security.
Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the
present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined
as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the
security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery
in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other
than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell
the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any
remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other
comprehensive income, net of applicable taxes. A decline in value that is considered to be other-than-temporary is recorded as a loss
within noninterest income in the consolidated statement of income.
Common stock of the Federal Home Loan Bank (“FHLB”) represents ownership in an institution which is wholly owned by other
financial institutions. These equity securities are accounted for at cost, less impairment and are classified as other assets.
Loans Held for Sale
Through multiple secondary market investors, MVB Mortgage has the ability to offer customers long-term fixed rate and variable
rate mortgage products without holding these instruments in the Bank’s loan portfolio. MVB Mortgage elected the fair value option
and therefore records loans held for sale at fair value. Occasionally the Bank will sell portfolio loans and have them classified as
loans held for sale. These loans are recorded at lower of cost or market.
The Company has a loan indemnification reserve for loans sold that may be subject to repurchase in the event of specific default by
the borrower or subsequent discovery that underwriting standards were not met. The reserve amount was $200 thousand as of
December 31, 2018 and 2017.
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Table of Contents
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Loans are considered non-accrual when
scheduled principal or interest payments are 90 days past due. Interest income on loans is recognized on an accrual basis. The
allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan portfolio. The
Company consistently applies a quarterly loan review process to continually evaluate loans for changes in credit risk. This process
serves as the primary means by which the Company evaluates the adequacy of the allowance for loan losses, and is based upon
periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more
information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are impaired. The general
component covers all loans that are not impaired, and is based upon historical loss experience adjusted for qualitative factors.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification
policy. In reviewing risk within the Bank and Mortgage Company’s loan portfolio, management has determined there to be several
different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real
estate loans; (ii) commercial and commercial real estate secured loans; (iii) home equity loans; (iv) consumer and other loans. Factors
considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical
loss percentages for each loan category are calculated and used as the basis for calculating allowance allocations. Certain qualitative
factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical
loss percentages. These factors are then added to the historical allocation percentages to get the adjusted factor to be applied to non-
classified loans on a weighted basis, by risk grade. The following qualitative factors are analyzed:
• Lending policies and procedures
• Nature and volume of the portfolio
• Experience and ability of lending management and staff
• Volume and severity of problem credits
• Conclusions of loan reviews, audits and exams
• National, state, regional and local economic trends and business conditions
General economic conditions
Unemployment rates
Inflation / CPI
• Value of underlying collateral
• Existence and effect of any credit concentrations
• Consumer sentiment
• Other external factors
The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough
review is presented to the Chief Credit Officer and/or the Management Loan Committee (“MLC”), as required with respect to any
loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The
placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be
placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make
scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays
potential loss characteristics. Normally, all accrued interest is reversed 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 timely payments. Removal of a loan from
non-accrual status requires the approval of the Chief Credit Officer and or MLC.
A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and shortages generally
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are not classified as impaired. Generally, the Company considers impaired loans to include loans classified as non-accrual loans,
loans past due for longer than 90 days and troubled debt restructurings.
The Company defers loan origination and commitment fees and direct loan origination costs and the net amount is amortized as an
adjustment of the related loan’s yield.
Troubled Debt Restructurings (TDRs)
A restructuring of debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties
grants a concession to the debtor that it would not otherwise consider. The determination of whether a concession has been granted
includes an evaluation of the debtor’s ability to access funds at a market rate for debt with similar risk characteristics and among
other things, the significance of the modification relative to unpaid principal or collateral value of the debt, and/or the significance
of a delay in the timing of payments relative to the frequency of payments, original maturity date or the expected duration of the
loan. The most common concessions granted generally include one or more modifications to the terms of the debt such as a reduction
in the interest rate for the remaining life of the debt, an extension of the maturity date at an interest rate lower than the current market
rate for new debt with similar risk, or reduction of the unpaid principal or interest. All TDRs are considered impaired loans.
Derivative Instruments
Interest Rate Lock Commitments and Hedges
The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to
funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be
derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30
days to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery
commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that
the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and hedges is very high due
to their similarity. As a result of these strategies, the Company limits the exposure of losses with these arrangements and will not
realize significant gains related to its rate lock commitments due to changes in interest rates. For loans not originated on a best effort
basis, the Company also uses mortgage-backed security hedges and pair-offs to mitigate interest rate risk by entering into securities
and mortgage-backed securities trades with brokers.
The fair value of rate lock commitments and hedges is not readily ascertainable with precision because rate lock commitments and
hedges are not actively traded in stand-alone-markets. The Company determines the fair value of rate lock commitments and hedges
by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock
commitments will close. Fair value changes are recorded in noninterest income in the Company’s consolidated statement of income.
At December 31, 2018 and 2017, the balance of interest rate lock commitments was $1.7 million and $1.4 million, respectively.
There were no forward sales commitments as of December 31, 2018 and 2017.
Interest Rate Cap
The Company has entered into a rate protection transaction through SMBC Capital Markets, Inc. covering the period November 26,
2014 through December 1, 2019. The notional amount is $100 million and 3 month LIBOR is the underlying rate and the strike price
is 3%. The 5 year coverage is broken into 20 quarterly caps. The Company’s fixed cost in the interest rate cap was $1.5 million. The
credit support provider must maintain a long-term senior unsecured debt rating of A or better by S&P and A2 or better by Moody’s.
The interest rate cap agreement is a free-standing derivative and is recorded at fair value on the Company’s consolidated balance
sheet. Fair value changes are recorded in noninterest income in the Company’s consolidated net income statement. At December 31,
2018 and 2017, the fair value of the interest rate cap was $8 thousand and $33 thousand, respectively.
Interest Rate Swap
Beginning in 2015, the Company entered into interest rate swap agreements to facilitate the risk management strategies of a small
number of commercial banking clients. The Company mitigates this risk by entering into equal and offsetting interest rate swap
agreements with highly rated third-party financial institutions. The interest rate swap agreements are free-standing derivatives and
are recorded at fair value on the Company’s consolidated balance sheet. Fair value changes are recorded in noninterest income in
the Company’s consolidated net income statement. At December 31, 2018 and 2017, the fair value of interest rate swap agreements
was $1.4 million and $268 thousand, respectively.
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Fair Value Hedge
The Company entered into an interest rate swap designated as a fair value hedge to mitigate the effect of changing interest rates on
the fair values of the loans. This involves the receipt of variable amounts from a counterparty in exchange for the Company making
fixed payments over the life of the agreements without the exchange of the underlying notional amount. The gain or loss on the
derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The
Company entered into a pay-fixed/receive-variable interest rate swap in December 2018 with a notional amount of $45.0 million
which was designated as a fair value hedge associated with the Company’s fixed rate loan program. At December 31, 2018, the fair
value of interest rate swap hedge was $343 thousand.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs) are recorded when the Bank sells mortgage loans and retains the servicing on those loans. On a
monthly basis, MVB tracks the amount of mortgage loans that are sold with servicing retained. A valuation is done to determine the
MSR’s value, which is then recorded as an asset and amortized over the period of estimated net servicing revenues. The balance of
MSR’s is evaluated for impairment quarterly, and was determined not to be impaired at December 31, 2018 or 2017. Servicing loans
for others generally consists of collecting mortgage payments from borrowers, maintaining escrow accounts, remitting payments to
third party investors and when necessary, foreclosure processing. Serviced loans are not included in the Consolidated Balance Sheets.
At December 31, 2018 and 2017, the MSR’s value was $173 thousand and $182 thousand, respectively.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is computed for financial reporting
by the straight-line-method based on the estimated useful lives of assets, which range from 7 to 40 years on buildings and leasehold
improvements and 3 to 10 years on furniture, fixtures and equipment.
Intangible Assets and Goodwill
Goodwill is reviewed for potential impairment at least annually at the reporting unit level. In addition to the annual impairment
evaluation, the Company evaluates for impairment when events or circumstances indicate that it is more likely than not an impairment
loss has occurred. The Company performs its annual impairment test during the fourth quarter. The Company first assesses qualitative
factors to determine whether it is necessary to perform the two-step goodwill impairment test discussed below. The Company assesses
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
including goodwill. Examples of qualitative factors include: economic conditions; industry and market considerations; increases in
raw materials, labor, or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific
events such as changes in management, key personnel, strategy, or customers; and regulatory or political developments.
If, based on its assessment of the qualitative factors, the Company determines that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are not necessary.
If determined to be necessary, a two-step impairment test is performed to identify potential goodwill impairment and measure the
amount of a goodwill impairment loss to be recognized (if any). The first step requires the estimation of the reporting unit’s fair
value. If the fair value of the reporting unit exceeds the carrying value, including goodwill, no further testing is required. If the
carrying value exceeds the fair value, a second step is performed to determine whether an impairment charge must be recorded, and
if so, the amount of such charge.
It was decided that the Company would early adopt ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350) and did so for the period ended December 31,
2018. As such, the Company began using the one-step process for the annual impairment evaluation.
The Company’s assessment of qualitative factors determined that it is not more likely than not that the fair value of each reporting
unit is less than its carrying amount and therefore, goodwill is not impaired as of December 31, 2018 and 2017. As of December 31,
2018 and 2017, the Company had goodwill of $18.5 million, respectively.
Intangible assets include core deposit intangibles which are amortized over their useful life of ten years using the double-declining
balance method and have been reviewed for impairment. Net core deposit intangibles are included in accrued interest receivable and
other assets on the consolidated balance sheet and totaled $550 thousand and $646 thousand as of December 31, 2018 and 2017,
respectively.
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Restricted Bank Stock
The Bank is a member of the FHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB
that varies with the level of advances outstanding with the FHLB. As of December 31, 2018 and 2017, the Bank holds $11.3 million
and $7.6 million, respectively. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not
have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The
stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The
determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) a significant
decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b)
commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of
the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.
Management considered that the FHLB’s regulatory capital ratios have improved in the most recent quarters, liquidity appears
adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of
excess capital stock from its members during 2018 and 2017.
Foreclosed Assets Held for Resale
Foreclosed assets held for resale acquired in satisfaction of mortgage obligations and in foreclosure proceedings are recorded at fair
value less estimated selling costs at the time of foreclosure, with any valuation adjustments charged to the allowance for loan losses.
In subsequent periods, foreclosed assets are recorded at the lower of cost or fair value less any costs to sell. Any gains or losses on
sale are then recorded in other noninterest expense. At December 31, 2018 and 2017, the Company held other real estate of $2.1
million and $1.3 million.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain Company employees who have provided positive
consent allowing the Company to be the beneficiary of such policies. These policies are recorded at their cash surrender value, or
the amount that can be realized upon surrender of the policy. Income from these policies is not subject to income taxes and is recorded
as noninterest income.
Income Taxes
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on
the difference between the financial statement basis and income tax basis of assets and liabilities using the enacted marginal tax rates.
Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period.
Stock Based Compensation
Compensation cost is recognized for stock options and restricted stock units (“RSU’s”) issued to employees, based on the fair value
of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost
is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation
cost is recognized on a straight-line basis over the requisite service period for the entire award.
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Earnings Per 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 under the Company’s
2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt if dilutive.
(Dollars in thousands except shares and per share data)
2018
2017
2016
For the years ended
December 31,
Numerator for basic earnings per share:
Net Income from continuing operations
Less: Dividends on preferred stock
Net Income from continuing operations available to common shareholders - basic
Net Income from discontinued operations available to common shareholders - basic and
diluted
Net Income available to common shareholders
Numerator for diluted earnings per share:
Net Income from continuing operations available to common shareholders - basic
Add: Dividends on preferred stock
Add: Interest on subordinated debt (tax effected)
Net Income available to common shareholders from continuing operations - diluted
Denominator:
Total average shares outstanding
Effect of dilutive convertible preferred stock
Effect of dilutive convertible subordinated debt
Effect of dilutive stock options and restricted stock units
Total diluted average shares outstanding
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per common shareholder - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per common shareholder - diluted
Comprehensive Income
$
12,003
$
7,575
$
489
11,514
—
498
7,077
—
11,514
$
7,077
$
11,514
$
7,077
$
489
753
—
—
12,756
$
7,077
$
8,977
1,128
7,849
3,935
11,784
7,849
—
1,390
9,239
11,030,984
10,308,738
8,212,021
489,625
837,500
363,894
—
—
131,490
—
1,837,500
19,212
12,722,003
10,440,228
10,068,733
1.04
$
— $
1.04
1.00
$
$
— $
1.00
$
0.69
$
— $
0.69
0.68
$
$
— $
0.68
$
0.96
0.48
1.44
0.92
0.39
1.31
$
$
$
$
$
$
$
$
$
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and minimum pension
liability, are reported as a separate component of the equity section of the Consolidated Balance Sheet, such items, along with net
income, are components of comprehensive income.
In 2018, the Company was required to perform a reclassification from AOCI to retained earnings for stranded tax effects resulting
from the newly enacted federal corporate income tax rate in the Tax Reform Act, which was enacted on December 22, 2017. As
discussed previously, the Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective
January 1, 2018. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly
enacted 21 percent corporate income tax rate, which resulted in a decrease of $646 thousand.
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Marketing Costs
Marketing costs are expensed as incurred. Marketing expense was $1.1 million, $1.2 million and $1.3 million for 2018, 2017 and
2016, respectively.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company
does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Reclassifications
Certain amounts in the 2017 and 2016 consolidated financial statements have been reclassified to conform to the 2018 financial
statement presentation.
Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. This update requires a reclassification from accumulated other comprehensive income (“AOCI”) to
retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act,
which was enacted on December 22, 2017. The Tax Reform Act included a reduction to the corporate income tax rate from 34
percent to 21 percent effective January 1, 2018. The amendments in the ASU are effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 during the first
quarter of 2018 and elected to reclassify the income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount
of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate
income tax rate, which amounted to $646 thousand.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the
existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce
complexity in fair value hedges of interest-rate risk. The ASU eliminates the requirement to separately measure and report hedge
ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the hedged item. The ASU also changes certain documentation and assessment requirements and modifies the
accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public business entities
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is early adopting this ASU in
accordance with paragraph ASC 815-20-65-3 subpart C. The adoption of this ASU did not have a significant impact on the Company’s
financial condition, results of operations and consolidated financial statements. However, by early adopting, the Company is now
able to pursue additional hedging strategies as described above, including the ability to apply fair value hedge accounting to a specified
pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events. This will allow the
Company to better align its accounting and the financial reporting of its hedging activities with their economic objectives thereby
reducing the earnings volatility resulting from these hedging activities.
In March 2017, the FASB issued ASU 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain
purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased
callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities
that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium).
For public companies, this update will be effective for fiscal years beginning after December 15, 2018, including all interim periods
within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it
is our current policy to amortize premiums of investment securities to the earliest call date.
In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350), currently requires an entity that has not elected the private
company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an
entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of
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that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the
reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting
unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this update
remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment
as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the
reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies,
this update will be effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal
years. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected
credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial
assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase
price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses,
with such allowance limited to the amount by which fair value is below amortized cost. The guidance is effective for fiscal years
beginning after December 15, 2019 and interim periods within those fiscal years. The Company has formed an implementation team
led by the CFO, that also includes other lines of business and functions within the Company. The Company has also engaged a third
party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the
Company has researched and acquired software to assist in the development of models that can meet the requirements of the new
guidance. While this standard may potentially have a material impact on the Company’s consolidated financial statements, we are
still in the process of completing our evaluation.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
(1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
(2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where
necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. ASU 2016-02 initially required transition using a modified retrospective approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU
2018-11, Leases (Topic 842) - Targeted Improvements, which, among other things, provides an additional transition method that
would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December
2018, the FASB also issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements, for Lessors which provides certain
policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon the adoption of ASU 2016-02,
ASU 2018-11, and ASU 2018-20 on January 1, 2019, the Company expects to recognize right-of-use assets and related lease liabilities
ranging from $12.0 million to $13.0 million and $15.0 million to $16.0 million, respectively. The Company expects to elect to apply
certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any
existing leases. The Company also does not expect to apply the recognition requirements of ASU 2016-02 to any short-term leases
(as defined by related accounting guidance). The Company also expects to account for lease and non-lease components separately
because such amounts are readily determinable under our lease contracts and because the Company expects this election will result
in a lower impact on our balance sheet. The Company expects to utilize the modified-retrospective transition approach prescribed
by ASU 2018-11.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and Measurement
(Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation.
The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes
in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable
fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and
significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for
disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability
at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the
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balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax
assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. The Company adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on
January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with 5) above,
the Company measures fair value of its loan portfolio on a quarterly basis using an exit price notion. See Note 17, “Fair Value of
Financial Instruments” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement
creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue
guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or
services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or
services. The five steps are, (1) identify the contract with the customer, (2) identify the separate performance obligations in the
contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and
(5) recognize revenue when each performance obligation is satisfied. The Company evaluated the impact of this standard on individual
customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and
revenue streams. The Company determined that this standard did not have a material impact on its consolidated financial statements
because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan
interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards
and out of scope of ASC 606 revenue standard. The Company also completed an evaluation of certain costs related to customer
contracts and revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus
net). Based on the evaluation, the Company determined that the classification of certain debit and credit card related costs should
change (i.e., costs previously recorded as expense are now recorded as contra-revenue). This classification change resulted in
immaterial changes to both revenue and expense. The Company adopted the revenue recognition standard and its related amendments
as of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new
guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Consistent with the modified
retrospective approach, the Company did not adjust prior period amounts for the debit and credit card related cost reclassifications
noted above.
NOTE 2. INVESTMENT SECURITIES
There were no held-to-maturity securities at December 31, 2018 or December 31, 2017.
Amortized cost and fair values of investment securities available-for-sale at December 31, 2018 are summarized as follows:
(Dollars in thousands)
U. S. Agency securities
U.S. Sponsored Mortgage-backed securities
Municipal securities
Total debt securities
Other securities
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
$
79,041
$
52,154
84,747
215,942
10,308
14
—
206
220
68
$
(1,625) $
(2,039)
(1,192)
(4,856)
(68)
77,430
50,115
83,761
211,306
10,308
Total investment securities available-for-sale
$
226,250
$
288
$
(4,924) $
221,614
Amortized cost and fair values of investment securities available-for-sale at December 31, 2017 are summarized as follows:
(Dollars in thousands)
U. S. Agency securities
U.S. Sponsored Mortgage-backed securities
Municipal securities
Total debt securities
Equity and other securities
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Fair Value
$
81,705
$
59,387
74,482
215,574
15,940
81
31
1,733
1,845
644
$
(841) $
(1,264)
(373)
(2,478)
(18)
80,945
58,154
75,842
214,941
16,566
Total investment securities available-for-sale
$
231,514
$
2,489
$
(2,496) $
231,507
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The following table summarizes amortized cost and fair values of debt securities by maturity:
(Dollars in thousands)
Within one year
After one year, but within five
After five years, but within ten
After ten years
Total
December 31, 2018
Available for sale
Amortized Cost
Fair Value
$
$
11,066
$
37,332
26,778
140,766
215,942
$
11,260
36,593
26,045
137,408
211,306
Investment securities with a carrying value of $50.4 million and $113.3 million at December 31, 2018 and 2017, respectively, 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 December 31, 2018, the details
of which are included in the following table. Although these securities, if sold at December 31, 2018 would result in a pretax loss
of $4.9 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the
ability to hold these securities until all principal has been recovered. It is more likely than not that the Company will not sell any
securities at a loss for liquidity purposes. 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 December 31, 2018, the
Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the
Company will sustain any material realized losses as a result of the current temporary decline in fair value.
The following table discloses investments in an unrealized loss position at December 31, 2018:
(Dollars in thousands)
Description and number of positions
U.S. Agency securities (54)
U.S. Sponsored Mortgage-backed securities (42)
Municipal securities (78)
Other securities (2)
Less than 12 months
12 months or more
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
$
$
9,762
$
(123) $
63,740
$
2,360
5,936
2,452
20,510
$
$
(32)
(46)
(48) $
47,755
35,955
1,018
(249) $
148,468
$
$
(1,502)
(2,007)
(1,146)
(20)
(4,675)
The following table discloses investments in an unrealized loss position at December 31, 2017:
(Dollars in thousands)
Description and number of positions
U.S. Agency securities (45)
U.S. Sponsored Mortgage-backed securities (39)
Municipal securities (47)
Equity and other securities (2)
Less than 12 months
12 months or more
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
61,834
$
(659) $
7,709
$
16,825
8,826
1,034
(159)
(48)
(18)
37,427
16,781
—
(182)
(1,105)
(325)
—
$
88,519
$
(884) $
61,917
$
(1,612)
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Table of Contents
The Company sold investments available-for-sale of $2.7 million, $53.2 million and $55.2 million in 2018, 2017 and 2016,
respectively. These sales resulted in gross gains of $353 thousand, $1.1 million and $1.1 million and gross losses of $26 thousand,
$372 thousand, and $2 thousand in 2018, 2017 and 2016, respectively.
The Company sold no held-to-maturity investments during the years of 2018, 2017, or 2016.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company routinely generates 1-4 family mortgages for sale into the secondary market. During 2018, 2017 and 2016, the Company
recognized sales proceeds of $1.2 billion, $1.4 billion and $1.7 billion, resulting in mortgage fee income of $32.3 million, $37.1
million and $35.7 million, respectively.
The components of loans in the Consolidated Balance Sheet at December 31, were as follows:
(Dollars in thousands)
Commercial and Non-Residential Real Estate
Residential
Home Equity
Consumer
Total Loans
Deferred loan origination (fees) and costs, net
Loans receivable
2018
2017
$
941,033
$
294,929
59,015
9,605
783,909
246,214
62,400
12,783
1,304,582
1,105,306
(216)
635
$
1,304,366
$
1,105,941
The following table summarizes the primary segments of the loan portfolio as of December 31, 2018 and 2017:
(Dollars in thousands)
December 31, 2018
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
December 31, 2017
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
Commercial
Residential
Home
Equity
Consumer
Total
$
$
$
$
9,734
931,299
941,033
13,796
770,113
783,909
$
$
$
$
2,831
292,098
294,929
1,569
244,645
246,214
$
$
$
$
123
58,892
59,015
13
62,387
62,400
$
$
$
$
90
9,515
9,605
178
12,605
12,783
$
$
$
$
12,778
1,291,804
1,304,582
15,556
1,089,750
1,105,306
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 also separately evaluates individual consumer loans 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.
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.
75
Table of Contents
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for
which a specific allowance was not necessary as of December 31, 2018 and 2017:
(Dollars in thousands)
December 31, 2018
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Impaired Loans with
Specific Allowance
Impaired
Loans with
No Specific
Allowance
Total Impaired Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
Unpaid
Principal
Balance
$
4,885
$
1,842
—
6,727
—
—
—
$
668
375
—
1,043
—
—
—
387
396
2,224
3,007
2,831
123
90
$
5,272
$
2,238
2,224
9,734
2,831
123
90
5,292
2,300
3,601
11,193
2,882
123
316
Total Impaired Loans
$
6,727
$
1,043
$
6,051
$
12,778
$
14,514
December 31, 2017
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
$
3,283
$
22
$
979
$
4,262
$
4,603
—
7,886
—
—
69
1,150
—
1,172
—
—
16
2,814
2,117
5,910
1,569
13
109
7,417
2,117
13,796
1,569
13
178
4,275
7,921
4,090
16,286
1,601
13
475
Total Impaired Loans
$
7,955
$
1,188
$
7,601
$
15,556
$
18,375
Impaired loans have decreased by $2.8 million, or 17.9%, during 2018, due to multiple factors including increases due to the
identification of $5.6 million of recently impaired loans, the sale of three impaired commercial loans totaling $5.4 million, principal
curtailments of $738 thousand, partial charge-offs of $708 thousand, foreclosure and reclassification to other real estate owned of
$720 thousand, reclassification of $620 thousand of previously reported impaired loans to performing loans, and normal loan
amortization of $153 thousand.
The $5.6 million total of recently identified impaired loans includes $3.7 million, or 66.1%, of commercial loans, $1.6 million, or
28.6%, of residential mortgage loans, and $213 thousand, or 5.3%, of consumer loans. The commercial loans are primarily concentrated
in two relationships, including a $1.8 million note secured by a stalled real estate development project, and two notes totaling $1.4
million secured by a struggling automotive dealership. These three loans represent 86.5% of the recently impaired commercial loans,
while the remaining $500 thousand represent six additional commercial loans ranging from $11 thousand to $152 thousand in
outstanding balances.
The $5.4 million total of sold impaired loans includes three loans in two commercial relationships, including a $3.4 million purchased
participation note secured by a senior healthcare facility, a $1.1 million commercial real estate loan, net of a $579 thousand sold
participation, secured by a retail strip center, and a $874 thousand development loan secured by a developed commercial pad site
adjacent to the retail strip center. The healthcare loan was purchased by another investor with significant resources in the healthcare
industry, while the retail and development loans were purchased by an investor with personal ties to the project.
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The following table presents the average recorded investment in impaired loans and related interest income recognized for the years
ended:
December 31, 2018
December 31, 2017
December 31, 2016
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
Average
Investment
in
Impaired
Loans
Interest
Income
Recognized
on Accrual
Basis
Interest
Income
Recognized
on Cash
Basis
$
4,052
$
51
$
106
$
3,718
$
155
$
113
$
4,027
$
155
$
6,416
1,367
11,835
2,569
100
149
159
106
316
20
2
—
94
8
208
14
1
—
3,199
3,429
10,346
1,424
538
187
100
9
264
13
1
—
98
13
3,590
3,983
224
11,600
53
1
—
928
50
245
100
9
264
20
1
—
104
75
112
291
28
1
—
$
14,653
$
338
$
223
$
12,495
$
278
$
278
$
12,823
$
285
$
320
(Dollars in
thousands)
Commercial
Commercial
Business
Commercial Real
Estate
Acquisition &
Development
Total Commercial
Residential
Home Equity
Consumer
Total
As of December 31, 2018, the Bank held thirteen foreclosed residential real estate properties representing $914 thousand, or 43%,
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 four properties for a total of $395 thousand, while the other included seven properties for
a total of $174 thousand. The two remaining properties, totaling $345 thousand, were result of the foreclosure of two unrelated
borrowers. There are three additional consumer mortgage loans and one installment loan collateralized by residential real estate
property in the process of foreclosure. The total recorded investment in these loans was $1.5 million as of December 31, 2018. These
loans are included in the table above and have a total of $0 in specific allowance allocated to them.
Bank management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first
six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management
generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are
potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.
Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct
possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to
be charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the
Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential
mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession, or death
occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk
rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all
commercial relationships of one million dollars or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The
Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an
external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger
commercial relationships or criticized relationships. The Bank’s Credit Department compiles detailed reviews, including plans for
resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are
collectively evaluated for impairment are given separate consideration in the determination of the allowance.
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Table of Contents
The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of
Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2018 and 2017:
(Dollars in thousands)
December 31, 2018
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
December 31, 2017
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
Pass
Special
Mention
Substandard
Doubtful
Total
$
432,589
$
5,290
$
5,652
$
— $
443,531
371,309
118,754
922,652
290,602
58,100
9,359
2,071
179
7,540
2,608
876
164
2,181
2,879
10,712
1,600
39
19
—
129
129
119
—
63
375,561
121,941
941,033
294,929
59,015
9,605
$ 1,280,713
$
11,188
$
12,370
$
311
$ 1,304,582
$
371,041
$
4,816
$
4,506
$
— $
380,363
271,751
96,712
739,504
242,823
61,037
12,453
22,995
931
28,742
3,036
1,311
174
5,961
2,230
12,697
223
52
25
1,149
1,817
2,966
132
—
131
301,856
101,690
783,909
246,214
62,400
12,783
$ 1,055,817
$
33,263
$
12,997
$
3,229
$ 1,105,306
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as
determined by the length of time a recorded payment is past due.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough
review is presented to the Chief Credit Officer and/or the Management Loan Committee (“MLC”), as required with respect to any
loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The
placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be
placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make
scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays
potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless
Management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal.
To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of
future satisfactory payment performance. Usually, this requires a six-month recent history of payments due. Removal of a loan from
non-accrual status will require the approval of the Chief Credit Officer and or MLC.
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Table of Contents
The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual
loans as of December 31, 2018 and 2017:
(Dollars in thousands)
December 31, 2018
Commercial
Current
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total Past
Due
Total
Loans
Non-
Accrual
90+ Days
Still
Accruing
Commercial Business
$
432,097
$
6,380
$
1,746
$
3,308
$
11,434
$
443,531
$
3,684
$
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
374,880
121,644
928,621
291,665
58,575
9,485
681
—
7,061
1,000
400
28
—
—
1,746
760
40
10
—
297
3,605
1,504
—
82
681
297
12,412
3,264
440
120
375,561
121,941
941,033
294,929
59,015
9,605
385
426
4,495
2,442
84
82
Total Loans
$ 1,288,346
$
8,489
$
2,556
$
5,191
$
16,236
$ 1,304,582
$
7,103
$
December 31, 2017
Commercial
Commercial Business
$
377,901
$
512
$
1,368
$
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
300,282
99,573
777,756
243,177
61,907
12,634
45
—
557
1,879
240
11
1,149
874
3,391
707
240
—
582
380
1,243
2,205
451
13
138
$
2,462
$
380,363
$
1,027
$
1,574
2,117
6,153
3,037
493
149
301,856
101,690
783,909
246,214
62,400
12,783
5,206
2,117
8,350
1,157
13
179
Total Loans
$ 1,095,474
$
2,687
$
4,338
$
2,807
$
9,832
$ 1,105,306
$
9,699
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
Interest income on loans would have increased by approximately $771 thousand, $423 thousand, and $396 thousand for 2018, 2017
and 2016, respectively, if loans had performed in accordance with their terms.
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. As of the quarter ended September 30, 2017, the Bank adjusted its methodology to
allow 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 and the reserve totaled $204 thousand and $169 thousand as of December 31,
2018 and 2017, respectively.
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 above, which are based on the Federal call code assigned to each loan, provide the starting point for the
ALL analysis. Company and Bank management track 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.
79
Table of Contents
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.
The liability for unfunded commitments was $284 thousand as of December 31, 2018 and 2017.
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 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 December 31, 2018, 2017, and 2016.
Activity in the allowance is presented for the periods indicated:
(Dollars in thousands)
Commercial
Residential
Home
Equity
Consumer
Total
ALL balance at December 31, 2017
$
7,804
$
1,119
$
705
$
250
$
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2018
Individually evaluated for impairment
Collectively evaluated for impairment
(1,024)
15
1,810
8,605
1,043
7,562
$
$
$
$
$
$
(166)
22
430
1,405
$
— $
1,405
$
—
59
(80)
684
$
— $
684
$
9,878
(1,480)
101
2,440
(290)
5
280
245
$
10,939
— $
245
$
1,043
9,896
(Dollars in thousands)
Commercial
Residential
Home
Equity
Consumer
Total
ALL balance at December 31, 2016
$
7,181
$
990
$
728
$
202
$
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2017
Individually evaluated for impairment
Collectively evaluated for impairment
(1,138)
39
1,722
7,804
1,172
6,632
$
$
$
(141)
40
230
1,119
$
— $
1,119
$
(109)
(109)
4
82
705
$
— $
705
$
18
139
250
16
234
$
$
$
$
$
$
80
9,101
(1,497)
101
2,173
9,878
1,188
8,690
Table of Contents
(Dollars in thousands)
Commercial
Residential
Home
Equity
Consumer
Total
ALL balance at December 31, 2015
$
6,066
$
1,095
$
715
$
130
$
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2016
Individually evaluated for impairment
Collectively evaluated for impairment
(1,995)
(124)
(100)
(338)
8
3,102
7,181
376
6,805
$
$
$
$
$
$
2
17
990
122
868
$
$
$
9
104
728
36
692
$
$
$
1
409
202
9
193
$
$
$
8,006
(2,557)
20
3,632
9,101
543
8,558
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that
the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency
in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any
given date.
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
December 31, 2018 and 2017, the Bank had specific reserve allocations for TDR’s of $1.0 million and $439 thousand, respectively.
Loans considered to be troubled debt restructured loans totaled $8.0 million and $6.4 million as of December 31, 2018 and
December 31, 2017, respectively. Of these totals, $4.2 million and $5.9 million, respectively, represent accruing troubled debt
restructured loans and represent 33% and 38%, respectively, of total impaired loans. Meanwhile, as of December 31, 2018, $3.6
million represent three loans to two borrowers that have defaulted under the restructured terms. The largest of these loans, at $3.2
million, is a commercial loan to a company dependent of the coal industry. The other two of these loans, totaling $426 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 December 31, 2018. These two development loans were also considered
non-performing loans as of December 31, 2017.
During the year ended December 31, 2018, a restructured loan with an outstanding balance of $3.2 million defaulted under its modified
terms. This loan is to a borrower highly dependent on the coal industry and has experienced continued financial difficulty since the
loan was restructured, and as a result has not performed as agreed.
There were no commitments to advance funds to any TDRs as of December 31, 2018.
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The following table presents details related to loans identified as Troubled Debt Restructurings during the years ended December 31,
2018 and 2017.
New TDR’s 1
December 31, 2018
December 31, 2017
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
2
1
1
4
—
1
1
$
272
$
11
1,798
2,081
—
39
10
210
11
1,798
2,019
—
39
8
1
—
—
1
—
—
—
$
147
$
—
—
147
—
—
—
147
—
—
147
—
—
—
(Dollars in thousands)
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification
of the loan.
2,066
2,130
147
147
$
6
$
$
$
1
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment at December 31, were as follows:
(Dollars in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Construction in progress
Leasehold improvements
Accumulated depreciation
Net premises and equipment
2018
2017
$
3,934
$
17,235
14,293
2,642
1,670
39,774
(13,229)
$
26,545
$
3,901
17,358
14,864
855
1,530
38,508
(11,822)
26,686
In December 2017, the Bank closed and sold the land, building and certain furniture and equipment items from a branch located at
704 Foxcroft Avenue, Martinsburg, WV for a gain on sale of fixed assets of $343 thousand, which is included in other operating
income on the Consolidated Statements of Income.
Depreciation expense amounted to $2.8 million, $2.6 million and $2.0 million for 2018, 2017 and 2016, respectively.
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NOTE 5. DEPOSITS
Deposits at December 31, were as follows:
(Dollars in thousands)
Demand deposits of individuals, partnerships, and corporations
Noninterest bearing demand
Interest bearing demand
Savings and money markets
Time deposits including CDs and IRAs
Total deposits
Time deposits that meet or exceed the FDIC insurance limit
Maturities of time deposits at December 31, 2018 were as follows (Dollars in thousands):
2019
2020
2021
2022
2023
Total
2018
2017
213,597
$
376,398
317,697
401,462
125,963
436,303
284,795
312,519
1,309,154
$
1,159,580
15,280
$
18,832
266,714
84,919
13,451
24,256
12,122
401,462
$
$
$
$
$
NOTE 6. BORROWED FUNDS
The Bank is a member of the FHLB of Pittsburgh, Pennsylvania. The remaining maximum borrowing capacity with the FHLB at
December 31, 2018 was approximately $97.9 million. At December 31, 2018 and 2017 the Bank had borrowed $214.9 million and
$152.2 million. As of December 31, 2018, our maximum borrowing capacity with the FHLB was $465.3 million.
Short-term borrowings
Along with traditional deposits, the Bank has access to short-term borrowings from FHLB to fund its operations and investments.
Short-term borrowings from FHLB totaled $212.4 million at December 31, 2018, compared to $149.6 million at year-end 2017.
Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
Repurchase agreements
2018
2017
2016
$
212,395
$
149,596
$
171,117
264,297
2.27%
2.62%
100,969
220,097
1.16%
1.61%
87,733
137,822
210,600
0.51%
0.74%
Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase “repurchase agreements” with
customers represent funds deposited by customers, on an overnight basis, that are collateralized by investment securities owned by
the Company. Repurchase agreements with customers are presented as an individual line item 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
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amount of cash received in connection with the transaction and included in securities sold under agreements to repurchase on the
consolidated balance sheets. The primary risk with our repurchase agreements is market risk associated with the investments securing
the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments.
Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
All of the Company’s repurchase agreements were overnight agreements at December 31, 2018 and December 31, 2017. These
borrowings were collateralized with investment securities with a carrying value of $31.4 million and $23.1 million at December 31,
2018 and December 31, 2017, respectively, and were comprised of U.S. Government Agencies and Mortgage backed securities.
Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.
Repurchase agreements totaled $14.9 million at December 31, 2018, compared to $22.4 million in 2017.
Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
$
2018
2017
2016
$
14,925
18,536
20,903
0.30%
0.16%
$
22,403
25,160
25,972
0.30%
0.34%
25,160
27,066
29,561
0.27%
0.28%
Long-term notes from the FHLB as of December 31, were as follows:
(Dollars in thousands)
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
Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly
installments of $5 thousand, including interest of 5.22%
2018
2017
$
$
1,741
$
751
2,492
$
1,798
775
2,573
Subordinated Debt
Information related to subordinated debt is summarized as follows:
(Dollars in thousands)
Balance at end of year
Average balance during the year
Maximum month-end balance
Weighted-average rate during the year
Weighted-average rate at December 31
$
2018
2017
2016
$
17,524
25,774
33,524
6.81%
6.57%
$
33,524
33,524
33,524
6.69%
6.70%
33,524
33,524
33,524
6.64%
6.63%
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.
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On June 30, 2014, the Company issued its Convertible Subordinated Promissory Notes Due 2024 (the “Notes”) to various investors
in the aggregate principal amount of $29,400,000. The Notes were issued in $100,000 increments per Note subject to a minimum
investment of $1,000,000. The Notes expire 10 years after the initial issuance date of the Notes (the “Maturity Date”).
Interest on the Notes accrues on the unpaid principal amount of each Note (paid quarterly in arrears on January 1, April 1, July 1
and October 1 of each year) which rate shall be dependent upon the principal invested in the Notes and the holder’s ownership of
common stock in the Company. For investments of less than $3,000,000 in Notes, an ownership of Company common stock
representing at least 30% of the principal of the Notes acquired, the interest rate on the Notes is 7% per annum. For investments of
$3,000,000 or greater in Notes and ownership of the Company’s common stock representing at least 30% of the principal of the
Notes acquired, the interest rate on the Notes is 7.5% per annum. For investments of $10,000,000 or greater, the interest rate on the
Notes is 7% per annum, regardless of whether the holder owns or acquires MVB common stock. The principal on the Notes shall
be paid in full at the Maturity Date. On the fifth anniversary of the issuance of the Notes, a holder may elect to continue to receive
the stated fixed rate on the Notes or a floating rate determined by LIBOR plus 5% up to a maximum rate of 9%, adjusted quarterly.
The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors
of the Federal Reserve System, the Company may, after the Notes have been outstanding for five years, and without premium or
penalty, prepay all or a portion of the unpaid principal amount of any Note together with the unpaid interest accrued on such portion
of the principal amount of such Note. All such prepayments shall be made pro rata among the holders of all outstanding Notes.
At the election of a holder, any or all of the Notes may be converted into shares of common stock during the 30 day period after the
first, second, third, fourth, and fifth anniversaries of the issuance of the Notes or upon a notice to prepay by the Company. On
December 28, 2017, the Company distributed notices to the holders of the Notes that provide that the Company has elected to waive
the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion
at any time prior to July 1, 2019, which is the final conversion date for the Notes. The Notes will convert into common stock based
on $16 per share of the Company’s common stock. The conversion price will be subject to anti-dilution adjustments for certain events
such as stock splits, reclassifications, non-cash distributions, extraordinary cash dividends, pro rata repurchases of common stock,
and business combination transactions. The Company must give 20 days’ notice to the holders of the Company’s intent to prepay
the Notes, so that holders may execute the conversion right set forth above if a holder so desires.
Repayment of the Notes is subordinated to the Company’s outstanding senior debt including (if any) without limitation, senior secured
loans. No payment will be made by the Company, directly or indirectly, on the Notes, unless and until all of the senior debt then due
has been paid in full. Notwithstanding the foregoing, so long as there exists no event of default under any senior debt, the Company
would make, and a holder would receive and retain for the holder’s account, regularly scheduled payments of accrued interest and
principal pursuant to the terms of the Notes.
The Company must obtain a consent of the holders of the Notes prior to issuing any new senior debt in excess of $15,000,000 after
the date of issuance of the Notes and prior to the Maturity Date.
An event of default will occur upon the Company’s bankruptcy or any failure to pay interest, principal, or other amounts owing on
the Notes when due. Upon the occurrence and during the continuance of an event of default (but subject to the subordination provisions
of the Notes) the holders of a majority of the outstanding principal amount of the Notes may declare all or any portion of the outstanding
principal amount of the Notes due and payable and demand immediate payment of such amount.
The Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be
redeemed on any interest payment date after a date five years from the original issue date.
The Company reflects subordinated debt in the amount of $17.5 million and $33.5 million as of December 31, 2018 and December 31,
2017 and interest expense of $1.8 million, $2.2 million, and $2.2 million for the years ended December 31, 2018, 2017 and 2016,
respectively. 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 will provide an annual interest expense savings of $1.1 million.
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A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Amount
212,480
90
886
1,431
—
17,524
232,411
$
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
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.
Specifically, the Bank has entered 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.
Total contractual amounts of the commitments as of December 31, were as follows:
(Dollars in thousands)
Available on lines of credit
Stand-by letters of credit
Other loan commitments
Concentration of Credit Risk
2018
2017
329,229
$
327,647
22,156
28,852
12,297
1,396
380,237
$
341,340
$
$
The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers throughout
the Marion, Harrison, Monongalia, Kanawha, Jefferson and Berkeley County areas of West Virginia as well as the Northern Virginia
area and adjacent counties. Collateral for loans is primarily residential and commercial real estate, personal property, and business
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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 December 31, 2018 and 2017.
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.
NOTE 8. INCOME TAXES
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of
income and expense, primarily the provision for possible loan losses, allowance for losses on foreclosed assets held for resale,
depreciation, and accretion of discounts on investment securities are reported in different accounting periods for income tax purposes.
The provisions for income taxes for the years ended December 31, were as follows:
(Dollars in thousands)
2018
2017
2016
Current:
Federal
State
Deferred expense
Federal
State
Income tax expense
$
$
$
$
$
$
$
2,203
1,031
3,234
117
22
139
$
$
$
2,635
771
3,406
1,268
81
1,349
3,373
$
4,755
$
4,885
1,197
6,082
665
42
707
6,789
Income tax expense for 2017 was impacted by the adjustment of the Company’s deferred tax asset related to the reduction in U.S.
federal statutory income tax rate to 21% under the Tax Reform Act, which was signed into law on December 22, 2017. The Company
was required to revalue its net deferred tax asset to this lower rate, resulting in an income tax charge of $646 thousand.
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
(Dollars in thousands)
Tax at Federal tax rate
Tax effect of:
State income tax
Tax exempt earnings
Impact of deferred tax rate change
$
$
$
2018
2017
2016
Amount
%
Amount
%
Amount
%
3,229
21 % $
4,369
34 % $
6,689
34 %
738
(594)
—
3,373
4.8 %
(3.9)%
— % $
21.9 % $
771
(1,031)
646
4,755
6.0 %
(6.4)%
5.0 % $
38.6 % $
1,197
(1,097)
—
6,789
6.0 %
(5.5)%
— %
34.5 %
Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and expense for income tax and
financial statement purposes. As a result of the Tax Reform Act signed into law on December 22, 2017, deferred taxes as of December
31, 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%. Deferred taxes as of December 31, 2016 are
based on the previously enacted U.S. statutory federal income tax rate of 34%.
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Deferred income tax assets and (liabilities) were comprised of the following at December 31:
(Dollars in thousands)
Allowance for loan losses
Minimum pension liability
Unrealized loss on securities available-for-sale
Other
Gross deferred tax assets
Depreciation
Pension
Goodwill
Gross deferred tax liabilities
Net deferred tax asset
2018
2017
$
3,084
$
1,266
1,252
1
5,603
(1,143)
(138)
(1,827)
(3,108)
2,798
1,342
2
—
4,142
(1,137)
(21)
(1,523)
(2,681)
$
2,495
$
1,461
No deferred income tax valuation allowance is provided since it is more likely than not that realization of the deferred income tax
asset will occur in future years.
Among other things, the new tax law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the
corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year,
(iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for
tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related
to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception
for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit
insurance premiums.
As stated above, as a result of the enactment of the Tax Reform Act on December 22, 2017, the Company remeasured its net deferred
tax asset based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which this asset is
expected to reverse in the future. Notwithstanding the foregoing, the Company is still analyzing certain aspects of the new law and
refining its calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts.
Nonetheless, the Company recognized an income tax charge of $646 thousand in 2017. The remeasurement of the deferred tax asset
related to items that are charged or credited directly to AOCI was a component of 2017 income tax expense and recognized in
continuing operations as required by ASC Topic 740.
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial
statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition
threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-
than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is
no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited
exception, the Company’s federal and state income tax returns for taxable years through 2015 have been closed for purposes of
examination by the federal and state taxing jurisdictions.
MVB has invested, as a limited partner, in two Section 42 affordable housing investment funds. In exchange for these investments,
MVB receives its pro rata share of income, expense, gains, and losses, including tax credits, that are received by the projects. As of
December 31, 2018, MVB has recognized, as an investment, $3.6 million in the aggregate between the two affordable housing
investment funds. In addition, MVB has recognized no gains or losses from the two affordable housing investment funds.
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NOTE 9. RELATED PARTY TRANSACTIONS
The Company has granted loans to officers and directors of the Company and to their associates as well as loans to related companies.
These related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated parties and do not involve more than normal risk of collectability. Set forth below
is a summary of the related loan activity.
(Dollars in thousands)
December 31, 2018
December 31, 2017
Balance at
Beginning of
Year
Borrowings
Repayments
Balance at
End of Year
18,658
$
50,196
— $
(44,293) $
24,561
Executive
Officer and
Director
Retirements
$
28,536
$
129,947
$
(525) $
(139,300) $
18,658
$
$
The Company held related party deposits of $24.7 million and $17.1 million at December 31, 2018 and December 31, 2017,
respectively.
The Company held no related party repurchase agreements at December 31, 2018 and December 31, 2017.
NOTE 10. PENSION PLAN
The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time
employees. Benefits are based on years of service and the 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%.
On June 19, 2017, the Company and MVB Mortgage approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to
which the Chief Executive Office of MVB Mortgage is entitled to receive certain supplemental nonqualified retirement benefits.
The SERP took effect on December 31, 2017. If the executive completes three years of continuous employment with MVB Mortgage
prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8
million payable in 180 equal consecutive installments of $10 thousand. The liability is calculated by discounting the anticipated
future cash flows at 4.0%. The liability accrued for this obligation was $377 thousand and $1 thousand as of December 31, 2018 and
2017, respectively. Service cost was $376 thousand and $1 thousand in 2018 and 2017, respectively.
Pension expense was $286 thousand, $256 thousand and $273 thousand in 2018, 2017 and 2016, respectively.
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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 December 31, 2018 and 2017 is as follows:
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Assumption changes
Curtailment impact
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized net actuarial loss
Unrecognized prior service cost
Prepaid pension cost recognized
Accumulated benefit obligation
2018
2017
$
10,058
$
9,021
—
352
348
(1,127)
—
(215)
9,416
$
5,166
$
(429)
716
(215)
5,238
$
(4,179) $
4,687
—
508
$
—
360
95
775
—
(193)
10,058
4,573
467
319
(193)
5,166
(4,892)
4,972
—
80
9,416
$
10,058
$
$
$
$
$
$
At December 31, 2018, 2017 and 2016, the weighted average assumptions used to determine the benefit obligation are as follows:
Discount rate
Rate of compensation increase
The components of net periodic pension cost are as follows:
(Dollars in thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service costs
Amortization of net actuarial loss
Net periodic pension cost
2018
2017
2016
4.23%
N/A
3.55%
N/A
4.05%
N/A
2018
2017
2016
— $
— $
352
(372)
—
306
286
$
360
(345)
—
241
256
$
—
367
(330)
—
236
273
$
$
For the years December 31, 2018, 2017 and 2016, the weighted average assumptions used to determine net periodic pension cost
are as follows:
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
90
2018
2017
2016
3.55%
6.75%
N/A
4.05%
6.75%
N/A
4.30%
6.75%
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The Company’s pension plan asset allocations at December 31, 2018 and 2017 are as follows:
Plan Assets
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Total
12/31/2018
12/31/2017
5%
24%
17%
31%
23%
100%
9%
23%
13%
32%
23%
100%
The estimated net loss for the plan that is expected to be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next fiscal year is $271 thousand.
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18, “Fair Value Measurements” of the
Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K, the Plan’s assets at fair value as of December 31, 2018.
(Dollars in thousands)
Level I
Level II
Level III
Total
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Total assets at fair value
$
$
262
$
— $
— $
1,257
—
1,624
1,205
—
—
—
—
—
890
—
—
262
1,257
890
1,624
1,205
4,348
$
— $
890
$
5,238
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18, “Fair Value Measurements” of the
Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K, the Plan’s assets at fair value as of December 31, 2017.
(Dollars in thousands)
Level I
Level II
Level III
Total
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Total assets at fair value
$
$
465
$
— $
— $
1,188
—
1,653
1,188
—
—
—
—
—
672
—
—
465
1,188
672
1,653
1,188
4,494
$
— $
672
$
5,166
Investment in government securities and short-term investments are valued at the closing price reported on the active market on
which the individual securities are traded. Alternative investments and investment in debt securities are valued at quoted prices which
are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can
be directly observed. The methods described above may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting date.
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Below we show the best estimate of the plan contribution for next fiscal year. We also show the benefits expected to be paid in each
of the next five fiscal years, and in the aggregate for the five fiscal years thereafter.
(Dollars in thousands)
Contributions for the period of 01/01/18 through 12/31/18
Estimated future benefit payments reflecting expected future service
2019
2020
2021
2022
2023
2024 through 2028
Cash Flow
360
282
307
322
330
384
2,377
$
$
$
$
$
$
$
NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes the changes in carrying amounts of goodwill and other intangibles (core deposit intangibles) for the
periods presented:
(Dollars in thousands)
Balance at January 1, 2018
Amortization expense
Balance at December 31, 2018
Balance at January 1, 2017
Amortization expense
Balance at December 31, 2017
Balance at January 1, 2016
Amortization expense
Balance at December 31, 2016
Core Deposit Intangible
Goodwill
Gross
Accumulated
Depreciation
Net
$
$
$
$
$
$
18,480
—
18,480
18,480
—
18,480
18,480
—
18,480
$
$
$
$
$
$
1,006
—
1,006
1,006
—
1,006
1,006
—
1,006
$
$
$
$
$
$
(360) $
(96)
(456) $
(262) $
(98)
(360) $
(161) $
(101)
(262) $
646
(96)
550
744
(98)
646
845
(101)
744
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of
accounting. The value of the acquired core deposit relationships was determined using the present value of the difference between
a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The core deposit intangibles
are being amortized over a ten-year period using an accelerated method.
The table below presents estimated amortization expense for the Company’s other intangible assets (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
93
90
87
83
78
119
550
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The Company’s assessment of qualitative factors determined that it is not more likely than not that the fair value of each reporting
unit is less than its carrying amount and therefore, goodwill is not impaired as of December 31, 2018 and 2017. The Company has
not identified any triggering events since the impairment evaluation that would indicate potential impairment.
Core deposit intangibles are evaluated for impairment if events and circumstances indicate a potential for impairment. Such an
evaluation of other intangible assets is based on undiscounted cash flow projections. No impairment charges were recorded for other
intangible assets in any of the periods presented.
NOTE 12. STOCK OFFERINGS
On March 13, 2017, the Company entered into an Investment Agreement (the “Investment Agreement”) with its Chief Executive
Officer, Larry F. Mazza (“Mazza”). Pursuant to the Investment Agreement, Mazza committed to subscribe for and purchase, at the
Subscription Price, upon expiration of the Rights Offering, the number of shares of the Company’s common stock, if any, equal to
the amount by which 100,000 exceeds the number of shares purchased by Mazza in the Rights Offering. Pursuant to the Investment
Agreement, Mazza agreed not to sell or otherwise transfer any shares acquired in connection with the Investment Agreement for a
period of six months following the closing of the Rights Offering.
Larry F. Mazza purchased 100,000 shares of the Company’s common stock: 90,999 under the rights offering and 9,001 shares under
the Investment Agreement.
On March 13, 2017, the Company filed with the SEC a prospectus supplement and accompanying base prospectus (collectively, the
“Prospectus”) relating to the commencement of the Company’s rights offering (the “Rights Offering”), pursuant to which the Company
distributed, at no charge, non-transferable subscription rights to the holders of its common stock as of 5:00 p.m., Eastern time,
on March 10, 2017. The subscription rights were exercisable for up to a total of 434,783 shares of the Company’s common stock,
subject to such terms and conditions as further described in the Prospectus.
On April 20, 2017, the Company announced the completion of the rights offering, which expired at 5:00 p.m. Eastern time on April 14,
2017. All 434,783 shares offered in the rights offering were subscribed for, resulting in new capital of approximately $5.0 million.
Computershare, who served as subscription agent, completed its review and tabulation of subscriptions on April 19, 2017.
Computershare issued the shares acquired in the rights offering by book entry in the Company’s stock ownership records, which are
maintained by Computershare, as transfer agent, on or about April 20, 2017.
On December 5, 2016, the Company entered into Securities Purchase Agreements with certain accredited investors. Pursuant to the
Purchase Agreements, the Investors agreed to purchase an aggregate of 1,913,044 shares of the Company’s common stock, par value
$1.00 per share, at a price of $11.50 per share, as part of a private placement (the “Private Placement”). The Private Placement closed
on December 6, 2016. The gross proceeds to the Company from the Private Placement were approximately $22 million or $20.5
million after stock issuance costs. The proceeds from the Private Placement were used by the Company to pay related transaction
fees and expenses and for general corporate purposes. A portion of the proceeds were used for the redemption of the preferred stock
issued to the United States Department of Treasury in connection with the Company’s participation in the Small Business Lending
Fund.
The Purchase Agreements contain representations and warranties and covenants of the Company and the Investors that are customary
in private placement transactions. The provisions of the Purchase Agreements also include an agreement by the Company to indemnify
the Investors against certain liabilities.
The Purchase Agreements required the Company to file a registration statement with the Securities and Exchange Commission (the
“SEC”) to register for resale the 1,913,044 shares of common stock issued to the Investors in the Private Placement. The registration
statement was declared effective by the SEC on December 27, 2016.
On June 30, 2014, the Company filed Certificates of Designations for its Convertible Noncumulative Perpetual Preferred Stock,
Series B (“Class B Preferred”) and its Convertible Noncumulative Perpetual Preferred Stock, Series C (“Class C Preferred”). The
Class B Preferred Certificate designated 400 shares of preferred stock as Class B Preferred shares. The Class B Preferred shares
carry an annual dividend rate of 6% and are convertible into shares of Company common stock within thirty days after the first,
second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of $16 per share, as adjusted
for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class B Preferred
Stock regarding the Company’s agreement to waive the timing requirements associated with when a conversion may occur and,
instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion date for the
Preferred Stock. The Class B Preferred shares are redeemable by the Company on or after the fifth anniversary of the original issue
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date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any necessary regulatory
approvals. In the event of liquidation of the Company, shares of Class B Preferred stock shall be junior to creditors of the Company
and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A. Holders of Class B Preferred shares shall have no
voting rights, except for authorization of senior shares of stock, amendment to the Class B Preferred shares, share exchanges,
reclassifications or changes of control, or as required by law.
The Class C Preferred Certificate designated 383.4 shares of preferred stock as Class C Preferred shares. The Class C Preferred
shares carry an annual dividend rate of 6.5% and are convertible into shares of Company common stock within 30 days after the
first, second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of $16 per share, as
adjusted for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class
C Preferred Stock regarding the Company’s agreement to waive the timing requirements associated with when a conversion may
occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion
date for the Preferred Stock. The Class C Preferred shares are redeemable by the Company on or after the fifth anniversary of the
original issue date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any
necessary regulatory approvals. In the event of liquidation of the Company, shares of Class C Preferred stock shall be junior to
creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A and the Class B Preferred
shares. Holders of Class C Preferred shares shall have no voting rights, except for authorization of senior shares of stock, amendment
to the Class C Preferred shares, share exchanges, reclassifications or changes of control, or as required by law. The proceeds of these
preferred stock offerings will be used to support continued growth of the Company and its subsidiary.
On September 8, 2011 MVB received $8.5 million in Small Business Lending Fund (SBLF) capital. MVB issued 8,500 shares
of $1,000 per share preferred stock with dividends payable in arrears on January 1, April 1, July 1 and October 1 each year. MVB’s
loan production qualified for the lowest dividend rate possible of 1%. MVB may continue to utilize the SBLF capital through March 8,
2016 at the 1% dividend rate. After that time, if the SBLF is not retired, the dividend rate increases to 9%. On January 5, 2017, the
Company redeemed all of the 8,500 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, liquidation
amount $1,000 per share (“Series A Preferred Stock”). The aggregate redemption price of the Series A Preferred Stock was $8,508,500,
including dividends accrued, but unpaid through, but not including the redemption date. The Series A Preferred Stock was redeemed
from the Company’s surplus capital and approved by the Company’s primary federal regulator. The redemption terminated the
Company’s participation in the SBLF program. After the redemption, the Company’s capital ratios remained well in excess of those
required for well capitalized status.
NOTE 13. STOCK OPTIONS AND OTHER EQUITY AWARDS
The MVB Financial Corp. Incentive Stock Plan (the “Plan”) provides for the issuance of stock options, restricted stock awards
(“RSA’s”), and RSU’s to selected employees and directors. During 2017, the Company’s shareholders amended the Plan to increase
the total number of shares of stock available for grant of awards by 1.0 million. As of December 31, 2018, the Plan had 3.2 million
shares authorized and 865,306 shares remaining available for issuance. To date, the Company has awarded both stock options and
RSU’s to selected employees and directors.
Total compensation expense recorded on stock options and RSU’s during 2018, 2017 and 2016 was $1.3 million, $813 thousand and
$568 thousand, respectively. Proceeds from stock options exercised were $2.1 million, $(10) thousand and $32 thousand during
2018, 2017 and 2016, respectively. During 2018, 2017 and 2016, certain options were exercised in cashless transactions. Shares were
forfeited related to exercise price and tax withholdings and the Company paid tax authorities amounts due resulting in a net cash
outflow.
Stock Options
Under the provisions of the Plan, the option price per share shall not be less than the fair market value of the common stock on the
date of the grant. Stock options expire 10 years from the date of the grant. With the exception of 22,000 shares granted in 2010 that
vest in 3 years and expire 10 years from the date of grant, and 125,000 shares granted in 2017 that vest in 4 years and expire in 10
years, all options granted vest in 5 years and expire 10 years from the date of the grant.
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The following summarizes MVB’s stock options as of and for the year ended December 31, 2018, and the changes for the year then
ended:
2018
2017
Number of
Shares
Weighted
Average
Exercise Price
Number of
Shares
Weighted
Average
Exercise Price
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
1,681,645
$
256,344
(161,298)
(13,200)
13.46
19.50
13.54
14.97
1,499,795
$
321,750
(49,400)
(90,500)
Outstanding at end of year
1,763,491
$
14.36
1,681,645
Exercisable at end of year
994,598
$
13.21
910,647
$
$
13.11
15.12
12.24
8.41
13.46
13.00
Weighted-average fair value of options granted during 2018
Weighted-average fair value of options granted during 2017
Weighted-average fair value of options granted during 2016
$
$
$
5.97
4.05
2.98
The intrinsic value of options exercised during 2018, 2017 and 2016 was $871 thousand, $8 thousand and $108 thousand, respectively.
The fair value for the options was estimated at the date of grant using a Black-Scholes option-pricing model with average risk-free
interest rates of 2.81%, 2.29% and 1.31% for 2018, 2017 and 2016, respectively, and a weighted average expected life of the options
of 7 years for all three years. The expected volatility of MVB’s stock price used for 2018 options was 18.64%, while for the 2017
options it was 22.76% and 2016 options it was 19.07%. The expected dividend yield used was 0.54% for 2018, 0.60% for 2017 and
0.43% for 2016.
The following summarizes information related to the total outstanding and exercisable stock options at December 31, 2018:
Options Outstanding
Options Exercisable
Total Options
Weighted-
Average
Exercise Price
Intrinsic Value
Weighted-
Average
Remaining Life
Total Options
Weighted-
Average
Exercise Price
Intrinsic Value
Weighted-
Average
Remaining Life
1,763,491
$14.36
6,496,537
6.21
994,598
$13.21
4,804,917
4.76
Restricted Stock Units
Under the provisions of the Plan, RSU’s are similar to restricted stock awards, except the recipient does not receive the stock
immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance
milestones or upon remaining with the Company for a particular length of time. Each RSU that vests entitles the recipient to receive
one share of the Company’s common stock on a specified issuance date. The recipient does not have any stockholder rights, including
voting, dividend, or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient becomes the record
holder of those shares.
The Company granted 62,735 RSU’s during 2018, 53,585 time-based and 9,150 performance-based. Performance-based RSU’s vest
in one installment at the end of three years based on set criteria and time-based RSU’s vest solely based on time and continued
employment in one installment at the end of five years.
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A summary of the activity for the Company’s RSUs for the period indicated is presented in the following table:
Balance at beginning of year
Granted
Vested
Forfeited
Balance at end of year
2018
Shares
Weighted Average Grant Date Fair Value
— $
62,735
(1,368)
(1,022)
60,345
$
—
19.29
18.27
19.55
19.31
At December 31, 2018, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense related
to unvested RSU awards was $860 thousand. Based upon the contractual terms, this expense is expected to be recognized as follows:
(Dollars in thousands)
2019
2020
2021
2022
2023
$
$
240
240
182
182
16
860
Stock-Based Compensation Expense
Stock-based compensation expense is recognized as salary and employee benefit cost in the consolidated statements of income based
on their fair values on the measurement date, which, for the Company, is the date of the grant. Total stock-based compensation
expense recorded on stock options and RSU’s during 2018, 2017 and 2016 was $1.3 million, $813 thousand and $568 thousand,
respectively.
The amount that the Company recognized in stock-based compensation expense related to the issuance of stock options and RSU’s
is presented in the following table:
(Dollars in thousands)
Stock Options
RSU’s
Total Stock-based compensation expense
2018
2017
2016
$
$
935
331
1,266
$
$
813
—
813
$
$
568
—
568
NOTE 14. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital
adequacy guidelines the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts
and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Capital adequacy guidelines have recently changed as a result of the Dodd-Frank Act and a separate, international capital initiative
known as “Basel III.” Regulators have issued rules implementing these requirements (“Revised Capital Rules”). Among other things,
the Revised Capital Rules raise the minimum thresholds for required capital and revise certain aspects of the definitions and elements
of the capital that can be used to satisfy these required minimum thresholds. While the rules became effective on January 1, 2014
for certain large banking organizations, most banking organizations, including MVB Financial Corp and the Bank, were required to
begin complying with these new requirements on January 1, 2015. These requirements were fully phased in during 2018.
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Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and
ratios of Total capital, Tier 1 capital and Tier 1 common equity to risk-weighted assets, and of Tier 1 capital to average assets, as
defined. As of December 31, 2018 and 2017, the Company meets all capital adequacy requirements to which it is subject.
The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, Tier 1 common equity risk-based and Tier 1 leverage ratios as set forth in the table below. Both the
Company’s and the Bank’s actual capital amounts and ratios are presented in the table below.
Actual
Minimum to be Well
Capitalized
Minimum for Capital
Adequacy Purposes with
Capital Buffer 1
Minimum for Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
As of December 31, 2018
Total Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 193,495
$ 186,127
13.8%
13.3%
N/A
N/A
N/A
N/A
$
140,065
10.0%
$ 138,314
9.88%
Tier 1 Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 168,672
$ 174,704
12.0%
12.5%
N/A
$
112,052
N/A
8.0%
N/A
N/A
$ 110,301
7.88%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 156,714
$ 174,704
11.2%
12.5%
N/A
$
91,042
N/A
6.5%
N/A
N/A
$
89,292
6.38%
Tier 1 Capital (to average assets)
Consolidated
Subsidiary Bank
$ 168,672
9.9%
N/A
$ 174,704
10.2%
$
85,315
N/A
5.0%
N/A
N/A
N/A
N/A
As of December 31, 2017
Total Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 178,147
$ 169,536
14.9%
14.2%
N/A
N/A
N/A
N/A
$
119,231
10.0%
$ 110,289
9.25%
Tier 1 Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 138,308
$ 159,097
11.5%
13.3%
N/A
$
95,385
N/A
8.0%
N/A
N/A
$
86,443
7.25%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 126,350
$ 159,097
10.6%
13.3%
N/A
$
77,500
N/A
6.5%
N/A
N/A
$
68,558
5.75%
Tier 1 Capital (to average assets)
Consolidated
Subsidiary Bank
$ 138,308
9.3%
N/A
$ 159,097
10.7%
$
73,119
N/A
5.0%
N/A
N/A
N/A
N/A
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
112,299
112,052
8.0%
8.0%
84,224
84,039
6.0%
6.0%
63,168
63,029
4.5%
4.5%
68,375
68,252
4.0%
4.0%
95,848
95,385
8.0%
8.0%
71,886
71,539
6.0%
6.0%
53,915
53,654
4.5%
4.5%
58,667
58,495
4.0%
4.0%
1 The capital conservation buffer requirement will be phased in over three years beginning in 2016. The capital buffer requirement
effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5% and the total
capital to 10.5% on a fully phased-in basis.
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NOTE 15. REGULATORY RESTRICTION ON DIVIDEND
The approval of the regulatory agencies is required if the total of all dividends declared by the Bank in any calendar year exceeds
the Bank’s net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years.
NOTE 16. LEASES
The Company leases land and building space for the operation of some banking offices. All such leases qualify as operating leases.
Following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2018:
(Dollars in thousands)
Years ended December 31:
2019
2020
2021
2022
2023
Thereafter
Total minimum payments required:
$
$
1,785
1,651
1,665
1,649
1,406
12,817
20,973
Total rent expense for the years ended December 31, 2018, 2017 and 2016 was $2.0 million, $2.0 million and $1.7 million, respectively.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures
for financial instruments.
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.
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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)
December 31, 2018
Financial assets:
Cash and cash equivalents
Certificates of deposits with other banks
Securities available-for-sale
Equity securities
Loans held for sale
Loans, net 1
Mortgage servicing rights
Interest rate lock commitment
Interest rate swap
Interest rate cap
Fair value hedge
Accrued interest receivable
Financial liabilities:
Deposits
Repurchase agreements
FHLB and other borrowings
Mortgage-backed security hedges
Interest rate swap
Fair value hedge
Accrued interest payable
Subordinated debt
December 31, 2017
Financial assets:
Cash and cash equivalents
Certificates of deposits with other banks
Securities available-for-sale
Loans held for sale
Loans, net 1
Mortgage servicing rights
Interest rate lock commitment
Interest rate swap
Interest rate cap
Accrued interest receivable
Financial liabilities:
Deposits
Repurchase agreements
FHLB and other borrowings
Mortgage-backed security hedges
Interest rate swap
Accrued interest payable
Subordinated debt
Carrying Value
Estimated Fair
Value
Quoted Prices in
Active Markets
for Identical
Assets (Level I)
Significant
Other
Observable
Inputs (Level II)
Significant
Unobservable
Inputs (Level
III)
$
$
$
$
$
22,221
14,778
221,614
9,599
75,807
1,293,427
173
1,750
1,375
8
343
7,710
1,309,154
14,925
214,887
853
1,375
343
1,064
17,524
20,305
14,778
231,507
66,794
1,096,063
182
1,426
268
33
5,296
1,159,580
22,403
152,169
78
268
643
33,524
$
$
$
$
$
22,221
14,300
221,614
9,599
75,807
1,276,065
173
1,750
1,375
8
343
7,710
1,249,164
14,925
214,969
853
1,375
343
1,064
18,250
20,305
14,695
231,507
66,794
1,093,824
182
1,426
268
33
5,296
1,126,615
22,403
152,190
78
268
643
35,117
$
$
$
$
$
22,221
—
—
6,027
—
—
—
—
—
—
—
—
$
— $
14,300
188,492
3,272
75,807
—
—
—
1,375
8
343
1,368
— $
—
—
—
—
—
—
—
$
1,249,164
14,925
214,969
853
1,375
343
1,064
18,250
20,305
—
1,607
—
—
—
—
—
—
—
$
— $
14,695
206,091
66,794
—
—
—
268
33
1,241
— $
—
—
—
—
—
— $
1,126,615
22,403
152,190
78
268
643
35,117
$
$
—
—
33,122
300
—
1,276,065
173
1,750
—
—
—
6,342
—
—
—
—
—
—
—
—
—
—
23,809
—
1,093,824
182
1,426
—
—
4,055
—
—
—
—
—
—
—
1 In accordance with the adoption of ASU No. 2016–01, the fair value of loans as of December 31, 2018 was measured using an exit
price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.
99
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Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in
circumstances occurs. During the year ended December 31, 2018, there was a transfer from Level III to Level II in equity securities
due to the receipt of a valuation that occurred during 2018.
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 18. FAIR VALUE MEASUREMENTS
Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This
enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or
liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.
Assets Measured on a Recurring Basis
As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. The Company classified investments in government securities as Level II instruments
and valued them using the market approach. The following measurements are made on a recurring basis.
• Available-for-sale investment and equity 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 year ended
December 31, 2018. 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. Also,
certain equity securities are independently valued and classified as Level III instruments.
• Loans held for sale — The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-
market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted
prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market
participants.
•
Interest rate lock commitment — The Company estimates the fair value of interest rate lock commitments based on the
value of the underlying mortgage loan, quoted mortgage-backed security prices and estimates of the fair value of the mortgage
servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.
• Mortgage-backed security hedges — MBS hedges are considered derivatives and are recorded at fair value based on
observable market data of the individual mortgage-backed security.
•
•
Interest rate cap — The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg
Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard
market volatility.
Interest rate swap — Interest rate swaps are recorded at fair value based on third party vendors who compile prices from
various sources and may determine fair value of identical or similar instruments by using pricing models that consider
observable market data.
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The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring
basis as of December 31, 2018 and 2017 by level within the fair value hierarchy. Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair value measurement.
(Dollars in thousands)
Assets:
U.S. Government Agency securities
U.S. Sponsored Mortgage backed securities
Municipal securities
Other securities
Equity securities
Loans held for sale
Interest rate lock commitment
Interest rate swap
Interest rate cap
Fair value hedge
Liabilities:
Interest rate swap
Fair value hedge
Mortgage-backed security hedges
(Dollars in thousands)
Assets:
U.S. Government Agency securities
U.S. Sponsored Mortgage backed securities
Municipal securities
Equity and other securities
Loans held for sale
Interest rate lock commitment
Interest rate swap
Interest rate cap
Liabilities:
Interest rate swap
Mortgage-backed security hedges
December 31, 2018
Level I
Level II
Level III
Total
$
— $
77,430
$
—
—
—
6,027
—
—
—
—
—
—
—
—
50,115
50,639
10,308
3,272
75,807
—
1,375
8
343
1,375
343
853
— $
—
33,122
—
300
—
1,750
—
—
—
—
—
—
77,430
50,115
83,761
10,308
9,599
75,807
1,750
1,375
8
343
1,375
343
853
December 31, 2017
Level I
Level II
Level III
Total
$
— $
80,945
$
—
—
1,607
—
—
—
—
—
—
58,154
52,933
15,666
66,794
—
268
33
268
78
— $
—
22,909
900
—
1,426
—
—
—
—
80,945
58,154
75,842
18,173
66,794
1,426
268
33
268
78
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The following table represents recurring level III assets:
(Dollars in thousands)
Balance at December 31, 2017
Realized and unrealized gains included in earnings
Purchase of securities
Transfer to Level II Assets
Unrealized gain included in other comprehensive income
(loss)
Unrealized loss included in other comprehensive income
(loss)
Balance at December 31, 2018
Balance at December 31, 2016
Realized and unrealized losses included in earnings
Purchase of securities
Unrealized gain included in other comprehensive income
(loss)
Balance at December 31, 2017
Assets Measured on a Nonrecurring Basis
Interest Rate Lock
Commitments
Municipal
Securities
Equity Securities
Total
$
1,426
$
22,909
$
900
$
25,235
324
—
—
—
—
$
$
1,750
1,546
(120)
—
—
—
6,232
—
4,191
(210)
33,122
6,135
—
16,381
393
$
$
—
—
(600)
—
—
300
300
—
600
—
$
$
1,426
$
22,909
$
900
$
324
6,232
(600)
4,191
(210)
35,172
7,981
(120)
16,981
393
25,235
$
$
$
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 GAAP. 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 non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-
financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible
assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at
fair value on a nonrecurring basis during 2018 and 2017 include certain foreclosed assets which, upon initial recognition, were
remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets
which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest
expense.
•
Impaired Loans — Loans for which it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired,
management measures impairment using one of several methods, including collateral value, liquidation value and discounted
cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs
based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired
real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well,
including internal valuations, comparable property analysis and contractual sales information.
• Other Real Estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process is valued
utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market
data or Level III inputs based on customized discounting criteria. At the time the foreclosure is completed, the Company
obtains a current external appraisal.
Assets measured at fair value on a nonrecurring basis as of December 31, 2018 and 2017 are included in the table below:
(Dollars in thousands)
Impaired loans
Other real estate owned
December 31, 2018
Level I
Level II
Level III
Total
$
— $
—
— $
11,735
$
—
2,145
11,735
2,145
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Table of Contents
(Dollars in thousands)
Impaired loans
Other real estate owned
December 31, 2017
Level I
Level II
Level III
Total
$
— $
—
— $
14,368
$
—
1,346
14,368
1,346
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities
measured at fair value at December 31, 2018 and 2017.
(Dollars in thousands)
December 31, 2018
Nonrecurring measurements:
Impaired loans
Other real estate owned
Recurring measurements:
Municipal securities
Equity securities
Interest rate lock commitments
(Dollars in thousands)
December 31, 2017
Nonrecurring measurements:
Impaired loans
Other real estate owned
Recurring measurements:
Municipal securities
Equity securities
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
11,735
Appraisal of collateral 1
2,145
Appraisal of collateral 1
Appraisal adjustments 2
Liquidation expense 2
Appraisal adjustments 2
Liquidation expense 2
20% - 62%
5% - 10%
20% - 30%
5% - 10%
33,122
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
300
Net asset value
Cost minus impairment
0%
1,750
Pricing model
Pull through rates
80% - 88%
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
14,368
Appraisal of collateral 1
1,346
Appraisal of collateral 1
Appraisal adjustments 2
Liquidation expense 2
Appraisal adjustments 2
Liquidation expense 2
20% - 62%
5% - 10%
20% - 30%
5% - 10%
22,909
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
900
Net asset value
Cost minus impairment
0%
$
$
$
$
$
$
$
$
$
Interest rate lock commitments
1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various
level III inputs which are not identifiable.
Pull through rates
Pricing model
73% - 85%
1,426
$
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.
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NOTE 19. COMPREHENSIVE INCOME
The following tables present the components of accumulated other comprehensive income (“AOCI”) for the years ended December 31:
(Dollars in thousands)
2018
2017
2016
Details about AOCI Components
Available-for-sale securities
Unrealized holding gains
$
Defined benefit pension plan items
Amortization of net actuarial loss
Amount
Reclassified
from AOCI
Amount
Reclassified
from AOCI
Amount
Reclassified
from AOCI
Affected line item in the Statement where
Net Income is presented
$
327
327
(88)
239
(306)
(306)
83
(223)
$
731
731
(292)
439
(241)
(241)
96
(145)
1,082
1,082
(433)
649
(236)
(236)
94
(142)
Gain on sale of securities
Total before tax
Income tax expense
Net of tax
Salaries and benefits
Total before tax
Income tax expense
Net of tax
Total reclassifications
$
16
$
294
$
507
(Dollars in thousands)
Balance at January 1, 2018
Other comprehensive loss before reclassification
Amounts reclassified from AOCI
Net current period OCI
Balance at Stranded AOCI
Balance at Mark to Market on equity positions held at December 31, 2017
Balance at December 31, 2018
Balance at January 1, 2017
Other comprehensive loss before reclassification
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2017
Unrealized gains
(losses) on
available for-sale
securities
Defined benefit
pension plan
items
Total
$
$
$
$
$
$
(5) $
(2,983) $
(3,042)
(239)
(3,281)
— $
(98) $
(16)
223
207
(646) $
— $
(2,988)
(3,058)
(16)
(3,074)
(646)
(98)
(3,384) $
(3,422) $
(6,806)
(1,598) $
(2,679) $
2,032
(439)
1,593
(449)
145
(304)
(5) $
(2,983) $
(4,277)
1,583
(294)
1,289
(2,988)
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NOTE 20. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Information relative to the parent company’s condensed balance sheets at December 31, 2018 and 2017, and the related condensed
statements of income and cash flows for the years ended December 31, 2018, 2017 and 2016 are presented below:
Condensed Balance Sheets
(Dollars in thousands)
Assets
Cash
Investment in subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity
Other liabilities
Long-term debt
Total liabilities
Total stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
(Dollars in thousands)
Income - dividends from bank subsidiary
Expenses - operating
Income (loss) before income taxes and undistributed earnings - continuing operations
Income tax (benefit) - continuing operations
Income after tax from continuing operations
Income before income taxes and undistributed earnings - discontinued operations
Income tax - discontinued operations
Income after tax from discontinued operations
$
$
$
December 31,
2018
2017
4,449
$
187,052
5,036
3,904
175,027
5,743
196,537
$
184,674
2,240
$
17,524
19,764
176,773
$
196,537
$
958
33,524
34,482
150,192
184,674
Year ended December 31,
2018
2017
2016
$
8,906
$
13,724
$
13,439
(4,533)
(1,569)
(2,964)
—
—
—
11,974
1,750
(2,147)
3,897
—
—
—
9,241
11,307
(2,066)
(2,072)
6
6,926
2,629
4,297
8,609
Equity in undistributed income earnings of subsidiaries
14,967
3,678
Net Income
Preferred dividends
Net Income available to common shareholders
$
$
$
12,003
$
7,575
$
12,912
489
11,514
$
$
498
7,077
$
$
1,128
11,784
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Condensed Statements of Cash Flows
(Dollars in thousands)
OPERATING ACTIVITIES
Net Income
Equity in undistributed earnings of subsidiaries
Increase (decrease) in other assets
Decrease (increase) in other liabilities
Stock option expense
2018
2017
2016
$
12,003
$
7,575
$
(14,967)
1,997
1,311
1,267
(3,678)
(2,214)
(234)
813
12,912
(8,609)
(612)
920
568
Net cash provided by provided by operating activities
1,611
2,262
5,179
INVESTING ACTIVITIES
Investment in subsidiary
(2,194)
(947)
(19,697)
Net cash used in investing activities
(2,194)
(947)
(19,697)
FINANCING ACTIVITIES
Proceeds of stock offering
AOCI reclassification of pension and available-for-sale investments
Proceeds from subordinated debt
Preferred stock issuance
Preferred stock redemption
Common stock options exercised
Cash dividends paid on common stock
Cash dividends paid on preferred stock
—
743
(35)
—
—
2,129
(1,220)
(489)
4,931
20,519
—
—
—
(8,500)
(10)
(1,033)
(498)
—
—
—
—
32
(646)
(1,128)
Net cash (used in) provided by financing activities
1,128
(5,110)
18,777
(Decrease) increase in cash
Cash at beginning of period
Cash at end of period
NOTE 21. SEGMENT REPORTING
545
(3,795)
4,259
3,904
7,699
3,440
$
4,449
$
3,904
$
7,699
The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding
company. Insurance services was previously identified as a reportable segment until entering into an Asset Purchase Agreement, as
discussed below and in Note 22, “Discontinued Operations” of the Notes to the Consolidated Financial Statements included in Item
8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Revenue from commercial and retail banking
activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue
from financial holding company activities is mainly comprised of intercompany service income and dividends.
Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage
origination process. The mortgage banking services are conducted by MVB Mortgage. Revenue from insurance services is comprised
mainly of commissions on the sale of insurance products.
On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI
purchased substantially all of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9
million, as discussed in Note 22, “Discontinued Operations” of the Notes to the Consolidated Financial Statements included in Item
8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. MVB Insurance retained the assets related
106
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to, and continues to operate, its title insurance business. The title insurance business is immaterial in terms of revenue and the
Company has reorganized MVB Insurance as a subsidiary of the Bank.
Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended December
31, 2018, 2017, and 2016 are as follows:
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expense
Total noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31, 2018
Total Assets as of December 31, 2018
Goodwill as of December 31, 2018
$
$
$
Commercial
& Retail
Banking
Mortgage
Banking
2018
Financial
Holding
Company
Intercompany
Eliminations
Consolidated
$
63,762
$
6,667
$
5
$
(674) $
13,667
50,095
2,386
47,709
585
6,479
7,064
14,924
20,081
35,005
19,768
4,265
15,503
—
15,503
$
$
4,085
2,582
54
2,528
32,880
(243)
32,637
23,927
8,608
32,535
2,630
677
1,953
—
1,953
$
$
1,756
(1,751)
—
(1,751)
—
6,411
6,411
7,373
4,309
11,682
(1,802)
1,128
—
1,128
(1,128)
(6,344)
(7,472)
—
(6,344)
(6,344)
(7,022)
(1,569)
(5,453) $
489
—
—
— $
—
69,760
17,706
52,054
2,440
49,614
32,337
6,303
38,640
46,224
26,654
72,878
15,376
3,373
12,003
489
(5,942) $
— $
11,514
2,284
$
272
$
137
$
— $
2,693
1,753,932
1,598
165,430
16,882
196,537
(364,930)
1,750,969
—
—
18,480
107
Table of Contents
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expense
Total noninterest expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31, 2017
Total Assets as of December 31, 2017
Goodwill as of December 31, 2017
$
$
$
Commercial
& Retail
Banking
Mortgage
Banking
2017
Financial
Holding
Company
Intercompany
Eliminations
Consolidated
$
52,423
$
4,698
$
4
$
(527) $
9,118
43,305
1,967
41,338
736
5,866
6,602
12,266
19,523
31,789
16,151
5,820
10,331
—
10,331
$
$
2,317
2,381
206
2,175
37,262
(2,372)
34,890
26,196
8,188
34,384
2,681
1,082
1,599
—
1,599
2,241
(2,237)
—
(2,237)
—
5,466
5,466
5,646
4,085
9,731
(1,375)
848
—
848
(849)
(5,403)
(6,252)
—
(5,404)
(5,404)
(6,502)
(2,147)
(4,355) $
498
(4,853) $
$
$
—
—
— $
—
— $
56,598
12,301
44,297
2,173
42,124
37,149
3,557
40,706
44,108
26,392
70,500
12,330
4,755
7,575
498
7,077
3,226
$
1,187
$
83
$
— $
4,496
1,533,497
1,598
149,323
16,882
184,674
(333,192)
1,534,302
—
—
18,480
108
Table of Contents
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Noninterest Income:
Mortgage fee income
Other income
Total noninterest income
Noninterest Expenses:
Salaries and employee benefits
Other expense
Total noninterest expenses
Income (loss) from continuing operations,
before income taxes
Income tax expense (benefit) - continuing
operations
Net income (loss) from continuing
operations
Income (loss) from discontinued operations
Income tax expense (benefit) - discontinued
operations
Net income (loss) from discontinued
operations
Net income (loss)
Preferred stock dividends
Net income (loss) available to common
shareholders
Capital Expenditures for the year ended
December 31, 2016
Total Assets as of December 31, 2016
Goodwill as of December 31, 2016
Commercial & Retail Banking
Commercial
& Retail
Banking
Mortgage
Banking
Financial
Holding
Company
Insurance
Intercompany
Eliminations
Consolidated
2016
$
50,413
$
4,285
$
3
$
— $
(578) $
1,035
39,359
8,437
41,976
3,632
38,344
(252)
5,905
5,653
11,592
18,009
29,601
14,396
4,496
2,082
2,203
—
2,203
36,960
1,674
38,634
27,696
8,125
35,821
5,016
1,954
2,226
(2,223)
—
(2,223)
—
5,247
5,247
5,937
3,144
9,081
(6,057)
(2,072)
—
—
—
—
—
—
—
—
—
—
—
—
(1,613)
1,035
—
(1,035)
(5,294)
(6,329)
—
(5,294)
(5,294)
—
—
$
9,900
$
3,062
$
(3,985) $
— $
— $
—
—
—
9,900
—
—
—
—
3,062
—
6,926
2,629
4,297
312
1,128
(580)
(218)
(362)
(362)
—
—
—
—
—
—
$
$
9,900
$
3,062
$
(816) $
(362) $
— $
11,784
1,145
$
220
$
303
$
— $
— $
1,668
1,415,735
1,598
122,242
16,882
180,340
—
—
—
(299,513)
1,418,804
—
18,480
54,123
11,132
42,991
3,632
35,673
7,532
43,205
45,225
23,984
69,209
13,355
4,378
8,977
6,346
2,411
3,935
12,912
1,128
For the year ended December 31, 2018, the Commercial & Retail Banking segment earned $15.5 million compared to $10.3 million
in 2017. Net interest income increased by $6.8 million, primarily the result of a $9.4 million increase in interest and fees on loans
which was offset by a $3.3 million increase in interest on deposits. Noninterest income increased by $462 thousand, primarily the
result of a $536 thousand increase in income on bank owned life insurance and a $562 thousand increase in the holding gain on
equity securities. These increases were partially offset by a $660 thousand decrease in the gain on sale of securities. Noninterest
expense increased by $3.2 million, primarily the result of the following: $2.7 million increase in salaries and employee benefits
expense, $281 thousand increase in occupancy and equipment expense, and a $584 thousand increase in professional fees. In addition,
provision expense increased by $419 thousand. Also, income tax expense decreased $1.6 million as a result of the new tax laws
enacted in late 2017.
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Mortgage Banking
For the year ended December 31, 2018, the Mortgage Banking segment earned $2.0 million compared to $1.6 million in 2017. Net
interest income increased $201 thousand, noninterest income decreased by $2.3 million, and noninterest expense decreased by $1.8
million. The decrease in noninterest income was primarily the result of a $4.4 million decrease in mortgage fee income, which was
partially offset by a $2.2 million decrease in the loss on derivative. The decrease in noninterest expense was primarily the result of
the following: $2.3 million decrease in salaries and employee benefits expense, which was primarily due to a 13.4% decrease in
origination volume and a $752 thousand decrease in the earn out paid to management of the mortgage company related to the 2012
acquisition. Other items that impacted noninterest expense were a $344 thousand increase in mortgage processing expense and a
$106 thousand increase in other operating expenses.
Financial Holding Company
For the year ended December 31, 2018, the Financial Holding Company segment lost $5.5 million compared to a loss of $4.4 million
in 2017. Interest expense decreased $485 thousand, noninterest income increased $945 thousand and noninterest expense increased
$2.0 million. In addition, the income tax benefit decreased $578 thousand. The increase in noninterest expense was primarily due to
a $1.7 million increase in salaries and employee benefits expense.
Insurance
In June 2016, primarily all the assets of the Insurance segment were sold and the segment was reorganized as a subsidiary of the
Bank. There was no insurance segment in 2017. The discontinued insurance segment lost $362 thousand in 2016.
NOTE 22. DISCONTINUED OPERATIONS
On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI, in which USI purchased substantially all of
the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million. 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 has 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.
There were no assets and liabilities of discontinued operations as of December 31, 2018 or 2017.
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Net income from discontinued operations, net of tax, for the years ended December 31, 2018, 2017, and 2016, were as follows:
(Dollars in thousands)
NONINTEREST INCOME
2018
2017
2016
Insurance and investment services income
$
— $
— $
Gain on sale of subsidiary
Other operating income
Total noninterest income
NONINTEREST EXPENSES
Salary and employee benefits
Occupancy expense
Equipment depreciation and maintenance
Data processing and communications
Marketing, contributions and sponsorships
Professional fees
Printing, postage and supplies
Insurance, tax and assessment expense
Travel, entertainment, dues and subscriptions
Other operating expenses
Total noninterest expense
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Net Income from discontinued operations
$
— $
— $
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
1,887
6,926
2
8,815
1,937
124
29
79
7
2
12
58
67
154
2,469
6,346
2,411
3,935
(Dollars in thousands)
2018
First quarter
Second quarter
Third quarter
Fourth quarter
(Dollars in thousands)
2017
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Income
Before Taxes
Net Income
Basic
Diluted
Earnings Per Share
$
15,054
$
11,465
$
3,291
$
2,594
$
16,944
18,176
19,586
12,655
13,524
14,410
3,596
4,549
3,940
2,831
3,579
2,999
$
0.24
0.25
0.30
0.25
0.23
0.25
0.29
0.24
Earnings Per Share
Interest
Income
Net Interest
Income
Income
Before Taxes
Net Income
Basic
Diluted
$
13,068
$
10,306
$
2,295
$
1,574
$
13,814
14,630
15,086
10,894
11,414
11,683
3,435
3,510
3,090
2,260
2,318
1,423
$
0.14
0.21
0.21
0.12
0.14
0.20
0.21
0.12
NOTE 24. REVENUE RECOGNITION
The Company records revenue from contracts with customers in accordance with Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the contract with a customer,
identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance
obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue
has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
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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.
Visa Debit Card and Interchange Income
Visa 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.
Other Operating Income
Other operating income is primarily comprised of ATM fees, wire transfer fees, travelers check fees, revenue streams such as safe
deposit box rental fees, and other miscellaneous service charges. ATM fees, wire transfer fees and travelers check fees are primarily
generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Safe deposit box rental fees
are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and
renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance
obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.
The Bank’s performance obligations for fees and other service charges are largely satisfied, and related revenue recognized, when
the services are rendered or upon completion. Payment is typically received immediately or in the following month. The Bank’s
performance obligation for the gains and losses on sales of other real estate owned is satisfied, and the related revenue recognized,
after each sale of other real estate owned is closed.
The following presents noninterest income, segregated by revenue streams in scope and out of scope of Topic 606, for the years
ended December 31:
(Dollars in thousands)
2018
2017
2016
Service charges on deposit accounts
Visa debit card and interchange income
Other
Noninterest income in scope of Topic 606
Noninterest income out of scope of Topic 606
Total noninterest income
$
$
1,033
$
765
$
647
558
2,238
36,402
1,258
260
2,283
38,423
38,640
$
40,706
$
112
764
1,185
115
2,064
41,141
43,205
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of MVB Financial Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MVB Financial Corp. and Subsidiary
(the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
Gaithersburg, Maryland
March 8, 2019
113
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 (the Principal Executive Officer), along with the Company’s Chief Financial Officer (the Principal
Financial and Accounting Officer), has evaluated the effectiveness, as of December 31, 2018, of the design and operation of the
Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act.
Based upon that evaluation, the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2018.
There have been no material changes in the Company’s internal control over financial reporting during the fourth quarter of 2018
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined under Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No.
5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the
normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework in 2013. Because there were no material weaknesses discovered,
management believes that, as of December 31, 2018, the Company’s internal control over financial reporting was effective.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidated financial statements
included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting, which
report is included in “Item 9A – Controls and Procedures” of this Annual Report on Form 10-K.
Date: March 8, 2019
Date: March 8, 2019
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)
114
Table of Contents
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2018 that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
115
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of MVB Financial Corp.
Opinion on Internal Controls Over Financial Reporting
We have audited MVB Financial Corp. and Subsidiary’s (the “Company”) internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion,
MVB Financial Corp. and Subsidiary maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the consolidated financial statements of MVB Financial Corp and Subsidiary as
of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018,
and our report dated March 8, 2019, expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Company's internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk and
performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Gaithersburg, Maryland
March 8, 2019
117
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ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act for the 2019 annual meeting of shareholders
(the “Proxy Statement”) not later than 120 days after December 31, 2018. The applicable information appearing in the Proxy
Statement is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2018. The applicable information appearing in the
Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information is omitted from this report (with the exception of the equity compensation plan information, which is reported in
Item 5 of this report and is incorporated herein by reference) pursuant to General Instruction G.(3) of Form 10-K as the Company
will file with the SEC its definitive Proxy Statement not later than 120 days after December 31, 2018. The applicable information
appearing in the Proxy Statement is incorporated by reference.
Equity Compensation Plan Information as of December 31, 2018:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options
(a)
Weighted-average
exercise price of
outstanding options
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) (c)
994,598
N/A
994,598
$
$
13.21
N/A
13.21
865.306
N/A
865.306
During 2018, 161,298 stock options under the Company’s equity compensation plan were exercised.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2018. The applicable information appearing in the
Proxy Statement is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as the Company will file with the
SEC its definitive Proxy Statement not later than 120 days after December 31, 2018. The applicable information appearing in the
Proxy Statement is incorporated by reference.
118
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm - Dixon Hughes Goodman LLP
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
(b) Exhibits
Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see “Exhibit Index”
below. The Exhibit Index specifically identifies each management contract or compensatory plan required to be filed as
an exhibit to this Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
119
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 8, 2019
MVB Financial Corp.
By:
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
POWER OF ATTORNEY AND SIGNATURES
Know all persons by the presents, that each person whose signature appears below constitutes and appoints Larry F. Mazza or
Donald T. Robinson or either of them, as attorney-in-fact, with each having the power of substitution, for him or her in any and
all capacities, to sign any amendment to this Form 10-K and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Federal Deposit Insurance Corporation hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Larry F. Mazza
Larry F. Mazza, President, CEO and Director
(Principal Executive Officer)
/s/ Donald T. Robinson
Donald T. Robinson, Executive Vice President and CFO
(Principal Financial and Accounting Officer)
/s/ David B. Alvarez
David B. Alvarez, Chairman
/s/ James J. Cava, Jr.
James J. Cava, Jr., Director
/s/ Harry E. Dean III
Harry E. Dean III, Director
/s/ John W. Ebert
John W. Ebert, Director
/s/ Daniel W. Holt
Daniel W. Holt, Director
/s/ Gary A. LeDonne
Gary A. LeDonne, Director
/s/ Kelly R. Nelson
Kelly R. Nelson, Director
/s/ J. Christopher Pallotta
J. Christopher Pallotta, Director
120
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Date: March 8, 2019
Table of Contents
EXHIBIT INDEX
Description
Exhibit Location
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.2†
10.3†
10.4
Articles of Incorporation, as amended
Second Amended and Restated Bylaws, as amended
Specimen of Stock Certificate representing MVB
Financial Corp. Common Stock
Form of Certificate for the SBLF Preferred Stock
Form of Subscription Rights Certificate
10.1†
MVB Financial Corp. 2003 Stock Incentive Plan
Annual Report Form 10-K, File No. 000-50567, filed
March 16, 2015, and incorporated by reference herein
Form 8-K, File No. 001-38314, filed June 22, 2018, and
incorporated by reference herein
Form S-3 Registration Statement, File No. 333-228688,
filed December 6, 2018, and incorporated by reference
herein
Form 8-K, File No. 000-50567, filed September 12,
2011, and incorporated by reference herein
Form 8-K, File No. 000-50567, filed March 13, 2017,
and incorporated by reference herein
Form SB-2 Registration Statement, File
No. 333-120931, filed December 2, 2004, and
incorporated by reference herein
MVB Financial Corp. 2013 Stock Incentive Plan, as
amended
Form 10-K, File No. 001-38314, filed March 8, 2018,
and incorporated by reference herein
MVB Financial Corp. 2018 Annual Senior Executive
Performance Incentive Plan
Form 8-K, File No. 001-38314, filed February 23, 2018,
and incorporated by reference herein
Lease Agreement with Essex Properties, LLC for land
occupied by Bridgeport Branch
10.5†
Employment Agreement of Larry F. Mazza
10.6†
Employment Agreement of Donald T. Robinson
10.7†
Offer Letter for Donald T. Robinson
10.8
10.9
Asset Purchase Agreement by and among MVB
Insurance, LLC, MVB Financial Corp., and USI
Insurance Services LLC
Severance Agreement and Release of Claims by and
between MVB Financial Corp. and Bret S. Price
10.10
Form of Securities Purchase Agreement
Form SB-2 Registration Statement, File
No. 333-120931, filed December 2, 2004, and
incorporated by reference herein
Form 8-K/A, File No. 000-50567, filed January 24,
2014, and incorporated by reference herein
Form 8-K, File No. 000-50567, filed December 3, 2015,
and incorporated by reference herein
Form 8-K, File No. 000-50567, filed December 3, 2015,
and incorporated by reference herein
Quarterly Report on Form 10-Q, File No. 000-50567,
filed November 3, 2016, and incorporated by reference
herein
Quarterly Report on Form 10-Q, File No. 000-50567,
filed November 3, 2016, and incorporated by reference
herein
Form 8-K, File No. 000-50567, filed December 6, 2016,
and incorporated by reference herein
10.11†
10.12†
10.13†
Investment Agreement between MVB Financial Corp.
and Larry F. Mazza
Form 8-K, File No. 000-50567, filed March 13, 2017,
and incorporated by reference herein
Third Addendum to the Employment Agreement with
MVB Financial Corp. and MVB Bank, Inc. and H.
Edward Dean, III, President and Chief Executive
Officer of Potomac Mortgage Group, Inc., doing
business as MVB Mortgage
Fourth Addendum to the Employment Agreement with
MVB Financial Corp. and MVB Bank, Inc. and H.
Edward Dean, III, President and Chief Executive
Officer of Potomac Mortgage Group, Inc., doing
business as MVB Mortgage
Quarterly Report on Form 10-Q, File No. 000-50567,
filed July 31, 2017, and incorporated by reference
herein
Quarterly Report on Form 10-Q, File No. 000-50567,
filed July 31, 2017, and incorporated by reference
herein
10.14†
MVB Financial Corp. Form of Restricted Stock Unit
Grant Notice and Restricted Stock Unit Agreement
Form 8-K, File No. 001-38314, filed March 27, 2018,
and incorporated by reference herein
11
14
21
Statement Regarding Computation of Earnings per
Share
Code of Ethics
Subsidiary of Registrant
Filed herewith
Filed herewith
Filed herewith
121
Consent of Independent Registered Public Accounting
Firm
Filed herewith
EXHIBIT INDEX
Power of Attorney
Contained in signature page to this Annual Report on
Form 10-K
Table of Contents
23.1
24
31.1
31.2
32.1*
Certificate of Principal Executive Officer pursuant to
Section 302 of Sarbanes Oxley Act of 2002
Certificate of Principal Financial Officer pursuant to
Section 302 of Sarbanes Oxley Act of 2002
Certificate of Principal Executive Officer & Principal
Financial Officer pursuant to Section 906 of Sarbanes
Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
(*) In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s
Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the
certifications furnished in Exhibits 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes
of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(†) Management contract or compensatory plan or arrangement
122
Earnings per Share are calculated as follows:
Earnings Per Share
(Dollars in thousands except shares and per share data)
2018
2017
2016
For the years ended
December 31,
Exhibit 11
$
12,003
$
7,575
$
489
11,514
—
498
7,077
—
11,514
$
7,077
$
11,514
$
7,077
$
489
753
—
—
12,756
$
7,077
$
8,977
1,128
7,849
3,935
11,784
7,849
—
1,390
9,239
11,030,984
10,308,738
8,212,021
489,625
837,500
363,894
—
—
131,490
—
1,837,500
19,212
12,722,003
10,440,228
10,068,733
1.04
$
— $
1.04
1.00
$
$
— $
1.00
$
0.69
$
— $
0.69
0.68
$
$
— $
0.68
$
0.96
0.48
1.44
0.92
0.39
1.31
$
$
$
$
$
$
$
$
$
Numerator for basic earnings per share:
Net Income from continuing operations
Less: Dividends on preferred stock
Net Income from continuing operations available to common
shareholders - basic
Net Income from discontinued operations available to common
shareholders - basic and diluted
Net Income available to common shareholders
Numerator for diluted earnings per share:
Net Income from continuing operations available to common
shareholders - basic
Add: Dividends on preferred stock
Add: Interest on subordinated debt (tax effected)
Net Income available to common shareholders from continuing
operations - diluted
Denominator:
Total average shares outstanding
Effect of dilutive convertible preferred stock
Effect of dilutive convertible subordinated debt
Effect of dilutive stock options and restricted stock units
Total diluted average shares outstanding
Earnings per share from continuing operations - basic
Earnings per share from discontinued operations - basic
Earnings per common shareholder - basic
Earnings per share from continuing operations - diluted
Earnings per share from discontinued operations - diluted
Earnings per common shareholder - diluted
1
Exhibit 14
MVB Financial Corp. (hereinafter “MVB Financial”) and Its Wholly Owned Subsidiaries,
(hereinafter collectively “MVB”)
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
Board Approved: December 18, 2018
HR Committee: November 20, 2018
This policy applies to all senior financial officers of MVB. The senior financial officers include Larry F.
Mazza, Donald T. Robinson, Joshua A. Anderson, John T. Schirripa, Donald T. Robinson, Eric L. Tichenor,
David A. Jones, Kenneth L. Ash, Harry E. Dean III, Peter W. Cameron. (“Covered Persons”).
Specifically, the senior financial officers for MVB represent the following organizations:
MVB Financial Corp.
Larry F. Mazza, Donald T. Robinson, David A. Jones, and Joshua A. Anderson
MVB Bank, Inc.
Larry F. Mazza, Donald T. Robinson, John T. Schirripa, Eric L. Tichenor, David A. Jones,
Joshua A. Anderson, and Kenneth L. Ash
Potomac Mortgage Group, Inc.
Harry E. Dean III, Peter W. Cameron
This Code of Ethics is required by the United States securities laws and the rules and regulations
of the Securities and Exchange Commission as being necessary to deter wrongdoing and to
promote:
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of
(i)
interest between personal and professional relationships,
avoidance of conflicts of interest, including disclosure to an appropriate person or persons
(ii)
identified in the code of any material transaction or relationship that reasonably could be expected
to give rise to such a conflict,
full, fair, accurate, timely, and understandable disclosure in reports and documents that MVB
(iii)
files with, or submits to, the Commission and in other public communications made by MVB,
(iv)
compliance with applicable governmental laws, rules and regulations,
the prompt internal reporting of code violations to an appropriate person or persons identified
(v)
in the code; and
(vi)
accountability for adherence to the code.
If you have any questions regarding this Code, please feel free to contact the MVB Financial President
and Chief Executive Officer or the MVB Financial Chairman of the Board of Directors. If you are not
comfortable speaking with the MVB Financial President and Chief Executive Officer or MVB Financial
Chairman of the Board of Directors, you are encouraged to speak with the MVB Financial Senior Vice
President, Human Resources.
1. Each Covered Person must avoid any transaction or arrangement that would create a conflict
of interest or the appearance of a conflict of interest between personal and professional
relationships.
A conflict of interest may be generally defined as a conflict between the Covered Person’s private
interests and his or her responsibilities to MVB or an entity with which MVB maintains a relationship.
A conflict of interest can also arise when an immediate family member is involved in a transaction
or arrangement that in any way casts doubt upon the Covered Person’s independence. An
“immediate family member” includes a Covered Person’s spouse, parents, children, siblings,
mothers and fathers-in-law, sons and daughters-in-law, sisters-in-law, brothers-in-law, and anyone
(other than employees) who shares the Covered Person’s home.
2. Covered Persons may only accept items of nominal value as gifts from any individual or entity
that is involved or seeks to become involved in a business relationship with MVB.
The Bank Bribery Act prohibits Covered Persons and others from offering or receiving anything
of value where the item of value is offered with the intent of influencing MVB personnel or a
business transaction. This law is broad and carries civil and criminal penalties, including fines
and/or imprisonment.
Covered Persons may accept any non-cash item of value from customers only if it:
•
•
•
•
•
Is valued at $100 or less;
Is not intended to influence any decision by us;
Is unsolicited;
Is infrequent; and
Is not a quid pro quo.
Under no circumstances shall Covered Persons accept cash or any other form of money as a gift
from any customer. Gifts which are likely to be acceptable under these guidelines are: advertising
or promotional materials such as pens, pencils, key rings, calendars and similar items valued
under $100.
Additionally, Covered Persons may accept gifts from individuals who have both a personal
relationship with such Covered Persons, as well as a business relationship with MVB, for such
commonly recognized events or occasions as a promotion, wedding, retirement, or religious
observance, if valued at less than $100.
Generally, there is no threat of a violation of the Bank Bribery Act if acceptance of a gift or benefit
is based on an immediate family or personal relationship, which exists independent of any
business with MVB or if the gift or benefit is made available to the general public under the same
conditions on which it is made available to a Covered Person.
Payments for travel, lodging, meals and entertainment are normally permissible if they (i) are
reasonable in amount; (ii) are expended in the course of a legitimate business meeting or an event
intended to foster better business relations; (iii) would be paid by MVB as a business expense if
not paid for by the outside source; and (iv) are unsolicited.
If any Covered Person is offered or receive something of value in excess of the above- stated
amounts or any payment for travel, lodging, meals or entertainment, such person must disclose
the matter, in writing, to the President and Chief Executive Officer, and seek a determination on
acceptability. The reviewer will give due consideration to the criteria for permissible gifts and
whether receipt poses a threat to the integrity of MVB or might violate the Bank Bribery Act.
3. All Covered Persons are responsible for maintaining accurate financial records for MVB.
Covered Persons must closely adhere to the following accounting guidelines:
(i)
(ii)
All assets, liabilities and transactions of MVB should be accurately recorded
in accordance with MVB’s record keeping procedures and generally
accepted accounting principles;
No false or misleading entries are permitted to be knowingly made or caused to
be made in MVB’s record books, even if such entries would not be material to MVB
or its operations as a whole; and
(iii)
Any entries that are inaccurate, false or irregular should be promptly reported to
a member of the Audit Committee for an immediate corrective action.
4. Covered Persons must recognize that confidential information is an asset of MVB, and must
refrain from using inside information to their personal advantage.
Covered Persons must maintain the confidentiality of information entrusted to them by MVB or
its customers or suppliers, except when disclosure is authorized or legally mandated.
Confidential information includes all non-public information that might be of use to competitors,
or harmful to MVB or its customers or suppliers, if disclosed.
At its core, the prohibition against insider trading focuses on the buying, selling or trading in
securities using non-public information. The prohibition applies to securities of MVB as well as to
customers and suppliers of MVB and, or any entity with which MVB and has a business relationship.
Covered Persons are in a unique position to acquire non-public information about MVB, and such
information might influence their decision to buy, sell or trade securities. In addition to refraining
from using inside information in making their own investment decisions, Covered Persons should
also avoid discussing the inside information with friends or immediate family members (whether
at home or in the public) or mailing or faxing the inside information to outside sources unless
appropriate confidentiality agreements are in place to ensure that material, non-public information
is not used improperly.
5. The conduct of Covered Persons should be governed by the highest standards of integrity
and fairness.
Covered Persons should avoid those situations in which outside personal interests conflict
with MVB’s business. These situations include:
(i)
(ii)
Ownership by a Covered Person, or a member of his or her immediate family,
of a material financial interest in any outside enterprise that is involved or seeks
to become involved in a business relationship with MVB;
Ownership by a Covered Person, or a member of his or her immediate family,
of a material financial interest in any outside enterprise that competes for
business with MVB;
(iii)
Outside employment of a Covered Person, or a member of his or her immediate
family, whether as a consultant, director, officer, employee or independent
contractor, with an entity that is involved or seeks to become involved in a business
relationship with MVB; or
(iv)
Appointment of a Covered Person, or a member of his or her immediate family,
to a public office, board or commission that may create an appearance of a conflict
of interest between the goals and purposes of that organization and MVB
business. Such appointment would include a “public service” organization or a
not-for-profit organization.
6. Covered Persons must not take for themselves opportunities that they discover while working
for MVB, or use corporate property or information for personal gain.
Covered Persons must not (a) take personal advantage of a situation or knowledge acquired
through the use of his or her position or MVB’s property, if the situation or knowledge could be
used for MVB’s benefit, (b) use his or her position or MVB property or information for personal
gain, or (c) compete with the MVB. Covered Persons owe a duty to the MVB to advance its
interests whenever the opportunity arises.
7. In drafting periodic reports that are to be filed with the Securities and Exchange
Commission, Covered Persons should take all steps necessary to ensure full, fair, accurate,
timely and complete disclosure.
(i)
Go Beyond the Minimum Disclosure Required by Law. While in the past periodic
reporting has focused on disclosing only those items that were mandated by the
law, Covered Persons should go beyond the minimum requirements to convey
the full financial picture of MVB to the public.
Areas of special attention include: off-balance sheet structures, insider and affiliated party
transactions, board relationships, accounting policies, and auditor relationships.
(ii)
Make Sure All Relationships that Could Give Rise to Any Perceived Conflicts are
Fully Disclosed. Given the recent focus of lawmakers on a more complete
disclosure of any material conflict of interest to the public, it is important to ensure
that any transaction that threatens to create the appearance of a conflict of interest
must be fully disclosed in MVB’s periodic reports.
8. Covered Persons must comply with all laws and regulations that apply to MVB’s business.
All Covered Persons should understand those laws that apply to them in the performance of their
duties and ensure that their decisions and actions are conducted in conformity with those laws. Any
violation of the applicable laws can subject MVB or the implicated Covered Person to liability. Any
inquiries relating to compliance with applicable laws and regulations should be directed to the MVB
Financial Chief Risk Officer.
9. Accountability for adherence to the Code.
Failure to adhere to the above detailed responsibilities by the Covered Persons may result in disciplinary
action being taken against such persons. The disciplinary action may range up to and including
termination. The Board of Directors shall be responsible for determining the proper action to be taken.
Exhibit 21
MVB FINANCIAL CORP. AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2018
Subsidiaries of MVB Financial Corp.
The following are the only subsidiaries of MVB Financial Corp.:
Name of Subsidiary
MVB Bank Inc.
Potomac Mortgage Group, Inc., (D/B/A MVB Mortgage)
MVB Insurance, LLC
MVB Community Development Corporation
Jurisdiction of Incorporation
West Virginia
Virginia
West Virginia
West Virginia
1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of MVB Financial Corp. and Subsidiary
We consent to the incorporation by reference in the registration statements (Nos. 333-189512, 333-186910,
333-145716, and 333-120234) on Forms S-8 and (Nos. 333-180317, 333-208949, and 333-215140) on Forms S-3 of
MVB Financial Corp. and Subsidiary of our report, dated March 8, 2019, with respect to the consolidated financial
statements of MVB Financial Corp. and Subsidiary and the effectiveness of internal control over financial reporting,
which reports appear in MVB Financial Corp.’s 2018 Annual Report on Form 10-K.
Gaithersburg, Maryland
March 8, 2019
1
Form 10-K Certification
I, Larry F. Mazza, certify that:
CERTIFICATION
Exhibit 31.1
1.
I have reviewed this annual report on Form 10-K of MVB Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
account principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 8, 2019
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
1
Exhibit 31.2
Form 10-K Certification
I, Donald T. Robinson, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of MVB Financial Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
account principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 8, 2019
/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)
1
SIGNATURES
Exhibit 32.1
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized and based on our knowledge and belief that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
MVB Financial Corp.
By:
/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)
Date: March 8, 2019
Date: March 8, 2019
1
Morgantown
Fairmont
Clarksburg
Bridgeport
Inwood
Martinsburg
Charles Town
Leesburg
WASHINGTON D.C.
McLean
Reston
Fairfax
WEST VIRGINIA
Charleston
VIRGINIA
Greensboro
Raleigh
NORTH CAROLINA
Charlotte
Columbia
SOUTH CAROLINA
Wilmington
Supply
Charleston
MVB Bank
MVB Mortgage
MVB Bank & Mortgage
301 Virginia Avenue • Fairmont, West Virginia 26554
MVBbanking.com | 304- 363-4800 | 844-MVB-BANK (844-682-2265)