Annual Report
2019
Our Purpose
Trusted
Partners on
the Financial
Frontier —
Committed to
Your Success
Our Values
Love
We are respectful, considerate
and thoughtful towards our
Team Members, clients and
community.
Trust
We are reliable and act with
integrity.
Commitment
We take ownership of our
responsibilities in support of
MVB achieving its Purpose.
Adaptive
We easily respond to change in
a productive way.
Teamwork
We effectively and efficiently
work with others to accomplish
more.
ANNUAL REPORT 2019
3
A MESSAGE FROM THE CEO
Powering Your Potential
Beginning 2019 with very strong earnings and highly sought-
after noninterest-bearing deposit growth, MVB carried that
momentum through the year end, setting growth records
in multiple areas. Guided by our MVB 3.0 strategy, MVB
truly transformed in 2019 from a traditional bank to a an
independent, creative-thinking financial holding company with
a strong banking CoRe to power our potential for the future.
That’s really what we do at MVB. At our CoRe, we power your potential.
We fuel the American dream. We strive to unlock the potential within our
shareholders, clients, Team and communities. Your success is our success.
You deserve more than a bank. You deserve a trusted partner on the
financial frontier -- committed to your success. That’s who we are.
Leveraging Disruption
Enhancing Shareholder Value
MVB’s innovative model leverages the disruption
As your trusted partner, providing added shareholder
occurring in the financial services industry to the
value is always top of mind. Total shareholder return was
benefit of our shareholders.
increased in 2019 from MVB stock price appreciation,
increased dividend payouts and redemption of
In 2019, MVB validated that we are doing the right
outstanding subordinated debt which occurred without
things right, including executing well on increased
diluting shares.
assets through better margin; quality lending;
significant growth in deposits, especially NIB
deposits; and a surge in revenue at MVB Mortgage.
MVB’s story resonates with investors as illustrated
in our coverage by three analysts – Hovde Group;
Keefe, Bruyette & Woods; and Piper Sandler – which
is significant for a company of our size. MVB was
selected as a Sandler O’Neill Sm-All Star for 2019,
one of only 30 major exchange-traded banks to earn
this honor and one of only 13 new members to this
year’s class.
ANNUAL REPORT 2019
4
STRONG RESULTS
Annual Earnings
125%
in cre a s e
Dividend Increase
77.3%
in cre a s e
Market Capitalization
42.1%
in cre a s e
MVB’s total equity increased 20% year over year, and our growth
in book value per share grew from $14.55 as of December 31,
2018, to $17.13, or 18%, as of December 31, 2019. We grew our
dividend from $0.11 in 2018 to $0.195 in 2019 (a 77% increase).
2019 net income is nearly equal to our net income over the past
three years combined.
Investing in Team MVB
As part of our transformation from the inside out, every day we
live our Purpose and Values with a growth mindset. Our people,
Team MVB, and culture are second to none. We have grown from
35 Team Members in 2005 to more than 400 Team Members in
more than 20 different states in 2019.
Over the past year, we invested in our Team. With our partner
The Pacific Institute, we rolled out training for “Thought Patterns
for High Performance” across the entire company as part of our
ongoing Culture Initiative. To celebrate the completion of this
training, we hosted two special “Hacking the Rockstar Attitude”
NIB Deposits
Team events with celebrity drummer Mark Schulman.
39%
in cre a s e
In an effort to further and incentivize innovative thinking, we
empowered the Most Valuable Initiatives Team in the first quarter
to review Team Member suggestions for improving process
efficiencies. In the fourth quarter, we started the Team Member
Referral Program and launched the Emerging Leaders Program.
ANNUAL REPORT 2019
5
Total Assets
Net Income
$2,000
$1,750
s
n
o
$1,500
i
l
l
i
m
n
I
$1,250
$1,000
$1,250
s
n
o
i
l
l
i
m
n
$1,000
$1,534
$1,419
$1,384
$1,751
$1,944
$30
$25
$20
s
n
o
$15
i
l
l
i
m
n
I
$10
$5
$-
$27.0
$12.9
$12.0
$6.8
$7.6
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Deposits
Book Value & Tangible Book Value
$1,227
25%
$18
$1,013
$922
$879
s
t
i
s
o
p
e
D
l
a
t
o
T
f
o
%
a
s
a
B
N
I
20%
15%
10%
5%
0%
$16
$13
$12.20
$11
$9.81
$8
i
l
e
c
n
a
a
B
e
g
a
r
e
v
A
$750
$730
$500
$17.13
$15.20
$14.55
$13.63
$12.93
$12.92
$11.80
$11.01
2017
2018
2016
2015
Noninterest-bearing deposits
Interest-bearing deposits
Excludes deposits of branches held for sale.
2019
2015
2016
2017
2018
2019
Book Value
Tangible Book Value
Net Interest Margin
Non-Performing Loans / Total Loans
4.05%
3.90%
3.75%
3.60%
3.45%
3.30%
3.94%
3.85%
3.86%
3.87%
3.80%
3.47%
3.41%
3.27%
3.22%
3.15%
3.07%
3.00%
1.75%
1.65%
1.46%
1.17%
1.06%
0.99%
0.88%
0.59%
0.54%
0.87%
0.37%
1.50%
1.25%
1.00%
0.75%
0.50%
0.25%
0.00%
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
MVBF
Regional Peers
MVBF
Regional Peers
Regional peers are defined as public institutions headquartered in West Virginia, Maryland, Virginia, and the Washington D.C. MSA
Regional peers defined as public institutions headquartered in West Virginia, Maryland, Virginia and the Washington D.C.
with assets between $1.0 billion and $3.0 billion.
MSA with assets between $1.0 billion and $3.0 billion. Peer data reflects the most recent data publicly available.
ANNUAL REPORT 2019
6
Preserving the CoRe
to Stimulate Progress
MVB MORTGAGE
Now that MVB has successfully executed its MVB 3.0 “Blue Ocean”
Strategy. What’s next? At the end of 2019 and beginning of 2020 we took
some creative steps to move our company toward the future.
Our Retail and Commercial Deposit Teams across all markets have been
combined to become our new CoRe Banking sales vertical – “CO” for
Commercial and “RE” for Retail. This new structure will facilitate stronger
$5.8 million
net income
Team MVB collaboration in each market to the benefit of our clients. MVB
Led by CEO Ed Dean, MVB Mortgage had an
intends to focus our growth in our CoRe Commercial markets, where we
have the most density, in West Virginia and Northern Virginia, supported
by our CoRe Banking footprint, as well as our expanding Fintech vertical.
MVB has essentially transformed from four sales verticals – Mortgage,
Fintech, Commercial and Retail – to two – CoRe Banking and Fintech.
extraordinary year and played a vital role
in overall earnings growth with 2019 net
income of $5.8 million and with $1.8 billion
in closed loan volume year (Year-End 2019).
With such a robust pipeline, keeping up
with it all year was a challenge, but a good
In their book, “Built to Last,” Jim Collins and Jerry I. Porras write about the
one, and the Mortgage Team stepped up to
concept “Preserve the Core, Stimulate Progress.”
meet that challenge head on.
“A visionary company has a relentless drive for progress, yet it is
concurrently ideological and progressive, i.e., it adapts without
compromising its Core ideals. There’s an ongoing dynamic interplay
between the Core and progress, and the visionary company embraces
both successfully.” - from the book, “Built to Last”
COMMERCIAL
LENDING
MVB is that visionary company exhibiting a dynamic duality. On one
hand we have our always constant Purpose and Values; on the other,
we have a progressive mindset seeking opportunities, continuous
improvement, innovation, entrepreneurship and creativity. On one hand
Strong growth in our Northern Virginia
market and consistent performance by our
we have our true CoRe, CoRe Banking and Commercial Lending; on the
Commercial Lending Team drove year-over-
other, we have our Fintech vertical and investments. Together, these two
year growth in total commercial loans, an
halves make more than a whole – the synergy between the two is what
increase of $138.9 million, or 14.8%, from
powers our potential for the future.
December 31, 2018. Loans, including loans
at branches held for sale, of $1.4 billion
as of December 31, 2019, increased $35.1
million, or 2.5%, from September 30, 2019,
and increased $113.1 million, or 8.7%, from
December 31, 2018.
Nonperforming loans decreased $2.0 million,
to 0.37% of total loans as of December 31,
2019, compared to 0.41% as of September 30,
2019, and 0.54% as of December 31, 2018.
ANNUAL REPORT 2019
7
Guiding Us Through Uncertain Times
Coming off the best year in our Company’s history,
Team MVB will step up no matter what disruptive
As I write this letter from my home office sitting
challenges come our way in 2020 and beyond. I still
beside my wife, Ann, I feel mixed emotions. We should
believe the best is yet to come for MVBF, our Team,
celebrate Team MVB’s smashingly successful 2019 year;
clients, shareholders and communities.
yet, as we head into 2020, our world is in the midst of
the worst pandemic of our time.
I am grateful for our dedicated Board of Directors and
Teammates. Thank you for believing in MVB and for
I find solace that our personal and MVB families are
allowing us to be your trusted partner. As always, feel
faring well, and that analysts are placing MVBF at the
free to contact me directly with comments or questions,
top of their conviction rankings of Outperformers
including ways we can assist you or someone you know
even during this challenging time. Notably, MVBF is top
with your financial needs.
ranked by the Hovde Group for being “well positioned
for an earnings defensibility perspective, and MVBF is
The best is yet to come,
poised to see a significant boost to its tangible book
value in 2020.”
Larry F. Mazza, President & CEO
MVB Financial Corp.
203.8% IRR internal
rate of return
MVB’s Fintech sales vertical continues to scale up and add
talent. To better serve our clients on the west coast, in 2019 we
expanded our footprint to include a dedicated Fintech Operations
on Fintech investment portfolio
Center in Salt Lake City, Utah. We also invested in up-and-coming
Fintech companies on the financial frontier.
In the second quarter of 2019, MVB reached a historic high, $15.4 million in net income – the best-ever quarter performance for MVB.
This milestone was due to a $13.5 million pre-tax gain realized in the second quarter from our forward-thinking Fintech investment
portfolio and was a critical boost to earnings. Our Fintech investment portfolio has a more than 203.8% Internal Rate of Return (IRR),
since its inception in 2016.
NIB deposits, including NIB deposits of branches held for sale, of $297.8 million as of December 31, 2019, increased $84.2 million, or
39.4%, from December 31, 2018. Our strategic initiatives in Fintech and specialty deposits are behind these results, with noninterest-
bearing deposits now 20.5% of our total deposits.
I
F
N
T
E
C
H
By welcoming Chartwell Compliance to the MVB family in the third quarter,
we demonstrated our commitment to compliance excellence, which we believe is not only the right thing
to do, but also a competitive advantage that mitigates risk within our Fintech vertical. Chartwell consistently
provides world-class compliance consulting and has formed a specialty niche in the Fintech industry, which
aligns with MVB as the preferred bank for Fintech companies.
The successful integration of Chartwell Compliance has exceeded our expectations as far as cooperation among our Team
Members. We will continue to leverage this competitive advantage that helps reduce risk for our expanding Fintech vertical.
L
L
E
W
T
R
A
H
C
I
E
C
N
A
L
P
M
O
C
ANNUAL REPORT 2019
8
MVB Bank
Recognized
for Outstanding
Community Impact
PILLARS OF THE
COMMUNITY AWARD
In June 2019, MVB Bank was presented with the prestigious Federal Home
Loan Bank of Pittsburgh Pillars of the Community Award in recognition of the
Bank’s commitment to community lending, revitalization and service over the past
year. The Pillars Award is FHLBank Pittsburgh’s highest organizational honor and is
presented annually to select FHLBank members.
John Bendel, FHLBank Senior Director of Community Investment, spoke at the June
awards event in Pittsburgh about MVB Bank’s community achievements. MVB CFO
Don Robinson and Laura Rye, Community Reinvestment Act Officer for MVB Bank and
Chief Operating Officer for the MVB Community Development Corporation, accepted
the award on behalf of MVB Bank.
“MVB Bank is committed to making positive change in the communities
it serves,” said Winthrop Watson, FHLBank Pittsburgh’s President and
CEO. “That commitment can be witnessed every day, as the bank works to
create affordable housing, assists small businesses, fights homelessness,
promotes homeownership and revitalizes communities. We are proud to
have MVB Bank as part of our membership cooperative.”
An active member of the FHLBank cooperative, MVB Bank saw completion in 2018 of
phase two of Deckers Court, a Habitat for Humanity project providing five new homes
to low-income families in Morgantown, West Virginia. The project used a grant from
FHLBank Pittsburgh’s Affordable Housing Program.
MVB Bank also took advantage of FHLBank’s Community Lending Program in 2018 to
provide financing to small businesses. MVB Bank made good use of the Home4Good
and First Front Door products, as well, ensuring that more individuals and families
find decent, affordable homes. Additionally, MVB Bank is now supporting the
Monticello neighborhood of Clarksburg in the Blueprint Communities revitalization
initiative.
R
U
O
G
N
T
C
A
P
M
I
I
I
I
S
E
T
N
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M
M
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C
3,413
hours
of volunteer service
As our Company continues to evolve, we will always remain
committed to the success of our communities, an important
aspect of our Purpose. Team MVB recorded more than 3,400
hours of volunteer service in 2019, and our company contributed
$300 thousand in sponsorships to nonprofit organizations.
ANNUAL REPORT 2019
9
CHANGING THE GAME
WVSSAC MVB Opioid Awareness
Summit Provides Hope
About one-eighth of West
Virginia’s economy, an
estimated $8.8 billion per year,
is spent to address the state’s
growing opioid epidemic.
West Virginia bears the highest
per-capita economic burden
caused by the opioid crisis in the
nation. The state also leads the
nation in opioid-related deaths.
Don Robinson, Executive Vice
President and Chief Financial
Officer for MVB Financial Corp.,
has a vested interest in fighting
this epidemic.
“I have seven children under the age of 18, and it is important to me as
a parent that we come together to address this issue affecting so many
families,” Robinson said.
On behalf of MVB, Robinson approached the West Virginia Secondary
Schools Activities Commission (WVSSAC) with ideas to influence change,
urging the organization to take action against the opioid epidemic and
initiate transformation within the Mountain State.
In 2019, MVB and the WVSSAC joined forces with West Virginia University,
Marshall University, the West Virginia Department of Education to address
the overwhelming opioid issue. The powerhouse team commenced the
For more information, visit wvgamechanger.com.
WVSSAC-MVB Bank Opioid Awareness Summit with a goal of increasing
awareness of the state’s growing opioid epidemic and establishing
possible solutions.
The first-of-its-kind events were held in September 2019 at the WVU
Coliseum in Morgantown and at Marshall’s Cam Henderson Center in
Huntington, where approximately 14,000 high school students attended
to hear influential messages from former NBA player and recovering
opioid addict Chris Herron, along with Rhonda Sciortino, who overcame
abandonment, abuse, poverty, filth and hunger while growing up in an
addictive household to build a life of affluence. Additionally, both events
were livestreamed to approximately 136,000 middle school and high
school teens.
“Both Chris and Rhonda shared ways to escape the tremendous impacts
of addiction and rallied the students of West Virginia to change the game,”
Robinson said. “The kids really responded to their stories. We received
a lot of positive feedback from the two Summit events. Connecting our
youth with resources to help them deal with the impact of opioid addiction
in their homes has been very powerful.”
The Opioid Awareness Summit was the successful kickoff to the extensive
WV Game Changers initiative, which focuses on prevention coupled with
compassionate treatment programs and educational and employment
opportunities.
“MVB Bank is a very valued corporate partner of the WVSSAC,” said Bernie
Dolan, WVSSAC Executive Director. “They are indeed Game Changers with
their innovative approach to addressing the opioid and substance misuse
in West Virginia. They have been with us from conceptualization until final
product and we value not only their input, but their hands-on approach
beginning with Larry Mazza and Don Robinson and including all their
employees and support staff. We would not have made the strides we
have in opioid and substance misuse without MVB Bank.”
ANNUAL REPORT 2019
10
HACKING THE ROCK
STAR ATTITUDE
Culture Initiative Continues
Throughout 2019, the word “culture” was quickly adopted into
the daily language of MVB Team Members when the Culture
Initiative, which launched in 2018, revved into high gear.
Refreshed Purpose, Values and Behaviors were among the year’s
initial projects. These refreshed standards that would soon make
up MVB’s secret sauce were a thoughtful combination of input and
suggestions from each Team Member throughout the organization.
A major milestone for the Culture Initiative was the introduction
of “Thought Patterns for High Performance,” a program launched
throughout MVB in partnership with The Pacific Institute (TPI) that
honed in on the science behind how people think and steps to
improve success through proven tools and techniques.
After 14 successful sessions led by 14 of MVB’s own Team Members-
turned-facilitators, roughly 95% of MVB Team Members began
implementing their new and improved thought patterns into their
careers and personal lives.
In August, Team MVB was ready to rock. One of the most anticipated
projects of the Culture Initiative to date was premiering two
exclusive events titled “Hacking the Rockstar Attitude,” which featured
world-class celebrity drummer and keynote speaker Mark Schulman.
Schulman took a break while on tour with P!NK to offer a rockin’ drum
performance as well as an empowering speech to Team Members in
both Virginia and West Virginia.
Foam fingers and glow sticks in hand, Team MVB gathered to listen
to Schulman’s praised performance. Applause erupted with each
drum performance, only to be quickly settled with intent listening as
Schulman spoke about concepts such as his AxB=C formula – Attitude
x Behavior = Consequences. During each event, Schulman picked a
Team Member from the audience to partake in a live drum lesson on
stage. Before heading back on tour, Schulman invited Team Members
and their friends and family, who were also in attendance, to join him
behind his drum set for photo opportunities.
ANNUAL REPORT 2019
11
From left to right are MVB’s Kim Barnum, Amy Walton, Tina Spangler and Herman DeProspero.
LIVING UNITED
Team MVB shows Transformational Support for the
United Way of Monongalia and Preston Counties
“MVB’s participation has been transformative for us in so many ways,” said UWMPC CEO Brandi Helms. “MVB is not only one of our
biggest sponsors but having someone like Herman on our board and committees has helped us to get the most out of our resources
by looking at our cash management and investment strategy. We know that our agency is healthy. Kim, another board member and
head of our personnel committee, has been key to our success in so many ways. Amy has helped us run our fundraising campaigns
and get word out about all of our activities on social media. When you get people like that involved you want to keep them involved!”
The United Way of Monongalia and Preston Counties (UWMPC) in West
Virginia is one of the region’s most dynamic non-profits, improving the
community's health and wellness, ensuring that children and youth have the
At a recent awards ceremony, DeProspero was named Advocate of the Year,
and MVB won the Community Advocate Award presented by UWMPC to one
company each year for its outstanding contributions to help meet the need of
support and experiences needed for a successful life and career and increasing
people in Monongalia and Preston Counties.
the number of financially stable households. UWMPC funds 24 agencies with
more than 40 programs.
One of the programs MVB supports is “Power of the Purse,” part of superstar
Dolly Parton’s national “Imagination Library,” which provides free books to
Team MVB has been an integral part of UWMPC’s mission every step of the
children from birth to age 5 to promote reading in the home. On Team MVB,
way for more than a decade, and 2019 was no exception. Members of the
Spangler runs the program. She is also lead committee member for Women’s
MVB family serve on its Board of Directors and committees, help keep the
United, a group that is supported by the United Way. Other activities include
organization’s finances on track to ensure that it has the maximum resources
annual food drives and outerwear collections.
available and participate as volunteers in a host of events throughout the year.
Herman DeProspero, Market President, MVB North Market; Kim Barnum, West
Virginia Regional Manager, Vice President, MVB Mortgage; Tina Spangler, North
Market Leader, MVB CoRe Banking; and Amy Walton, Banking Center Manager,
MVB Suncrest, are four of the most active MVB Team Members serving
UWMPC.
ANNUAL REPORT 2019
12
GOVERNMENT LENDING
MVB Launches New Unit
“The relationship we have with
MVB Bank is more than transactional,
it’s personal. The MVB Team
understands our goals as a small
business and has given us the flexibility
we needed to achieve rapid growth over
the past three years. They aren’t just our
bank, they’re our partner,”
said Dwight Hunt, B3 CEO/President.
One of the areas of growth in CoRe Banking is the new Government
MVB has strong relationships with clients like B3 Group, Inc., a digital
Lending Team, which launched in 2019, and is based at the Bank’s
transformation consulting firm based in Herndon, Virginia. Owned and
Northern Virginia regional corporate office in Reston, Virginia.
operated by Brad Palmer and 20-year U.S. Army veteran Dwight Hunt, B3 was
the fastest growing company in the Washington, D.C. area in 2019, according
Formation of the Team consolidates and expands the services MVB provides
to Washington Business Journal.
to clients resulting in a one-stop shop for government contractors. This effort
builds on MVB’s strong reputation for connecting government contractors
Turley provided B3 Group with a financing solution that offered support
with the resources they need to grow.
and flexibility, allowing B3 leadership to control its end-of-year planning and
execute their growth strategy. Ultimately that solution supported B3 Group’s
“MVB Bank has relationships with some of the top 10 fastest growing
ability to win the $686 million Digital Transformation Center (DTC) contract with
government contractors. We have a very strong portfolio of treasury
the U.S. Department of Veterans Affairs.
management services,” said Jamie Nalls, Chief CoRe Banking Officer. “From the
beginning, we have had a solid foundation in government leasing. However,
“The simplest way to put it is that we found the right creative, opportunistic
we identified the need to broaden our market share among small, mid- and
and mutually beneficial financial solution,” Turley said. “We made ourselves
large-sized government contractors. Serving this community connects us
experts on the company’s business model and goals, allowing them to target,
not only to our clients but also to owners and employees by strengthening
with precision, their goals and objectives while fully accounting for the industry
relationships through existing cash management services, retail and mortgage
‘trade winds’ when competing for federal contracts.”
platforms through MVB Mortgage.”
Christopher O. Turley serves as Market President of Government Lending. His
understanding of how MVB can support its clients by leveraging the
Team is focused on expanding relationship opportunities by providing and
breadth of capabilities, employees, products and services.
A truly stellar relationship goes beyond the contract. It requires an
supporting equipment leasing, merger and acquisition and general working
capital needs of government contractors.
“Government contracts are very competitive. It’s a small market with a few
very well-known players. Think six degrees of separation,” Turley said. “It’s
demanding. The government expects our clients to deliver in full and on time.”
ANNUAL REPORT 2019
13
MVB
Celebrates
20th
Anniversary
20BY
2020
with Acts
of Kindness
MVB has achieved many milestones in the growth journey of its 20-year plus history,
including expanding its footprint, being listed on The Nasdaq Capital Market and qualifying for
inclusion on the Russell 2000 Index. MVB Bank was formed in October 1997, chartered under the
laws of the State of West Virginia and commenced operations in January 1999. Each of the Bank’s
locations in West Virginia and Northern Virginia commemorated its 20th anniversary with cake and
balloons.
MVB wanted to extend its celebration by launching the MVB 20BY2020 Campaign in January
2019. The initiative including all Team Members focused on contributing 20 acts of kindness by
2020. Team MVB exceeded the goal of 20 acts of kindness and infectiously spread Respect, Love
and Caring throughout its communities. MVB’s two locations in Marion County, West Virginia,
participated in seven of the acts of kindness, including hosting a canned food drive for area
youth, visiting residents at a senior living facility, distributing goody bags to children at a local park,
donating supplies to several local nonprofit organizations and more. From preparing a hot meal
for guests of the Rosenbaum Family House in Morgantown, to delivering breakfast to neighbors in
Reston, Team Members across all MVB markets shared the love year-round.
SWEET DREAMS
When it was time to pack the lumber and hammers away after an
inspiring day of bed building, MVB, Medbrook Children’s Charity
and Harrison County SHP had collectively built 50 beds for children
When MVB heard of the good works of Sleep in Heavenly
throughout Harrison County. Additionally, MVB provided monetary
Peace in Harrison County, West Virginia, Team Members
donations and committed 92 volunteer service hours to SHP
throughout 2019. Team Members hosted two bedding drives to
provide comforters, sheets and pillows to accompany each new bed.
“MVB cares about our community and is proud to be part of
such a wonderful event,” said John Schirripa, MVB Bank Chief
Lending Officer and Regional President.
were eager to join the organization’s efforts to build beds for
children without one of their own. Sleep in Heavenly Peace (SHP),
a national nonprofit organization whose motto is “no kid sleeps on the
floor in our town,” is comprised of volunteers dedicated to building,
assembling and delivering beds to children in need.
“Giving kids a bed of their own provides them with a safe and private
space and leads to a good night’s rest, better performance in school,
better social skills and much more,” said Dave Lang, Harrison County
Chapter President of Sleep in Heavenly Peace. “That’s my driving force.”
On June 15, 2019, MVB hosted the Harrison County SHP Team as
well as the Medbrook Children’s Charity Team to participate in Bunks
Across America, a nationwide bed building event, in the parking lot of
MVB’s Bridgeport Operations Center.
The mission of Medbrook Children’s Charity is to improve the lives of
local children in need. Dr. Kelly Nelson, founder of Medbrook Children’s
Charity and member of MVB’s Board of Directors, said, “Being able to
provide bedding for children certainly fits that mission.”
ANNUAL REPORT 2019
14
MVB’S EXPERIENCED BOARD OF DIRECTORS
Experienced Board of Directors
DDaavviidd BB.. AAllvvaarreezz
Year Appointed: 2013
Chairman of the Board
President, Energy Transportation
JJaammeess JJ.. CCaavvaa,, JJrr..
Year Appointed: 2013
Managing Member, Cava & Banko, PLLC
Committees: Audit / ERM, Finance, HR &
Compensation
HHaarrrryy EEddwwaarrdd DDeeaann IIIIII
Year Appointed: 2012
CEO, MVB Mortgage
JJoohhnn WW.. EEbbeerrtt
Year Appointed: 2013
President, J.W. Ebert Corporation
Committees: Audit / ERM, Finance (Chair),
Nominating & Corporate Governance
CC
II
NN
II
GGaarryy AA.. LLeeDDoonnnnee
II
Year Appointed: 2016
Executive in Residence at the John Chambers
College of Business & Economics at WVU
Committees: Audit / ERM, Finance, HR &
Compensation (Chair)
LLaarrrryy FF.. MMaazzzzaa
Year Appointed: 2005
President & CEO, MVB & MVB Bank
DDrr.. KKeellllyy RR.. NNeellssoonn
Year Appointed: 2005
Physician
Committees: Audit / ERM, Nominating &
Corporate Governance (Chair), HR &
Compensation
JJ.. CChhrriissttoopphheerr PPaalllloottttaa
Year Appointed: 1999
Director, Bond Insurance Agency
Committees: Finance
NN
II
II
II
DDaanniieell WW.. HHoolltt
Year Appointed: 2017
Co-Founder & CEO, BillGO
Committees: Nominating & Corporate Governance
II
CChheerryyll DD.. SSppiieellmmaann
Year Appointed: 2019
Retired Partner, Ernst & Young
Committees: Audit / ERM (Chair), Finance
CC Independent Chairman. NN Non-Independent Director.
II
Independent Director.
ANNUAL REPORT 2019
15
SHAREHOLDER AND
CONTACT INFORMATION
Shareholders Meeting
The Annual Meeting of Shareholders of MVB Financial Corp. (MVB) will be held at 9:00 a.m. on May 19, 2020.
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 25, 2020, 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 (844-862-2265)
Form 10-K
A copy of the MVB Financial Corp. Form 10-K for 2019, 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
Balitmore, 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)
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from __________ to __________
Commission file number 000-50567
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Common Stock, $1.00 Par Value Per Share
MVBF
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on
which registered
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 (§232.405 of this chapter) 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 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,” and “emerging growth company” in Rule 12b-
2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark 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, 2019, the
aggregate market value of the common shares of the registrant held by non-affiliates during that time was $175,928,132. 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 are incorporated by reference into Part III of this Annual
Report on Form 10-K.
As of March 12, 2020, the registrant had 11,946,789 shares of common stock outstanding with a par value of $1.00 per share.
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
2
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3
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29
29
30
31
33
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59
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118
122
122
122
122
122
122
123
123
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” or the “Bank”). MVB Bank’s operating subsidiaries include
Potomac Mortgage Group (“PMG” which began doing business under the registered trade name “MVB Mortgage”), MVB
Insurance, LLC (“MVB Insurance”), MVB Community Development Corporation (“MVB CDC”), and ProCo Global, Inc.
(“ProCo” which began doing business under the registered trade name Chartwell Compliance “Chartwell”).
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. MVB
Insurance continues to operate its title insurance business, which is immaterial in terms of revenue. The Company reorganized
MVB Insurance as a subsidiary of the Bank in 2016.
MVB CDC was formed in 2017 and was created as a means to provide opportunities for loans and investments that help to
increase access to equity capital in under-served urban and rural areas of West Virginia and our market areas in Virginia. MVB
CDC promotes specific bank-driven economic development strategies, provides for effective support for its CRA compliance
strategy, and helps to support positive local reputation of the Bank through marketing and visible activities in the communities
where we live and work.
Chartwell Compliance, based from Bethesda, Maryland, was acquired by MVB on September 13, 2019. Chartwell Compliance
provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services
that include consulting, outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and
banks, in coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert
compliance resources to aid MVB in carrying out stringent and faster new client due diligence.
Business Overview
The Company’s primary business activities, through its subsidiaries, are primarily community banking and mortgage banking.
The Bank offers its customers a full range of products and services including:
•
•
•
•
•
•
Various demand deposit accounts, savings accounts, money market accounts, and certificates of deposit;
Commercial, consumer, and real estate mortgage loans and lines of credit;
Debit 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 dedicated Fintech sales team is based in Salt Lake City, UT and
specializes in providing banking services to corporate Fintech clients, with an overarching focus on operational risk and
compliance. This business line has the potential for fee income revenue as relationships grow.
The Bank’s financial products and services are offered through its financial service locations and automated teller machines
(“ATMs”) in West Virginia and Virginia, as well as telephone and internet-based banking through both personal computers and
mobile devices. Non-deposit investment services are offered through an association with a broker-dealer. The Bank has deployed
Automated Interactive Teller machines (“AITs”) in several branch locations. AITs provide services by featuring video interaction
3
with a bank employee upon request. A customer can deposit cash and checks and withdraw cash, as well as a variety of other
services typically occurring in a traditional branch location.
Since its opening in 1999, the Bank has experienced significant growth in assets, loans, and deposits due to strong community and
customer support in Marion and Harrison counties in West Virginia, expansion into Jefferson, Berkeley, Monongalia, and
Kanawha counties in West Virginia and, most recently, into Fairfax and Loudoun counties in Virginia. Since the acquisition of
PMG, mortgage banking is now a much more significant focus, which has opened increased market opportunities in the
Washington, DC metropolitan region 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 20, “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.
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, South Carolina, Georgia, and Florida. 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 3.4%, 3.7% and 3.9% in 2019, 2018, and 2017, 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 2019 December 2018 December 2017
3.5 %
4.5 %
2.9 %
5.5 %
3.5 %
5.0 %
2.5 %
2.6 %
3.6 %
4.2 %
3.0 %
5.1 %
3.9 %
4.7 %
2.1 %
2.1 %
3.0 %
4.5 %
2.7 %
5.0 %
3.4 %
4.4 %
1.9 %
1.9 %
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 21, “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.
On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI
4
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 21, “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 to, and continues to operate, its title insurance business. The title insurance business is immaterial in terms of
revenue.
Based on a measurement period that ended June 30, 2019, the Company earned and was reasonably assured to receive an
estimated earn-out payment of $600 thousand related to the Asset Purchase Agreement with USI. This estimate was recorded as
contingent consideration from discontinued operations. On August 27, 2019, the Company adjusted the estimate recorded in the
second quarter of 2019 to match the earn-out payment received of $575 thousand.
For more information about each of the Company’s reportable segments, please refer to Note 20, “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, 2019, the Bank had outstanding approximately $1.1 billion in commercial loans, including commercial,
commercial real estate, financial and agricultural loans. These loans represented approximately 77.4% of the total aggregate loan
portfolio as of that date.
Lending Practices. Commercial lending entails significant additional risks as compared with consumer lending (i.e., single-family
residential mortgage lending, and installment lending). In addition, the payment experience on commercial loans typically
depends on adequate cash flow of a business and thus may be subject, to a greater extent, to adverse conditions in the general
economy or in a specific industry. Loan terms include amortization schedules commensurate with the purpose of each loan, the
source of repayment and the risk involved. The primary analysis technique used in determining whether to grant a commercial
loan is the review of a schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to
service both interest and principal due. In addition, 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, 2019, the Bank had outstanding consumer loans in an aggregate amount of approximately $3.7 million or
approximately 0.3% 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, 2019, the Bank had approximately $306.7 million of residential real estate loans, home equity lines of credit,
and construction mortgages outstanding, representing 22.3% 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
5
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, 2019, residential mortgage construction loans to individuals totaled
approximately $130.9 million with an average life of 12 months and are generally refinanced to a permanent loan upon
completion of the construction.
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.
Employees
As of December 31, 2019, the Company had 443 employees, including 429 full-time employees.
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
6
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 subsidiaries 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
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, among other changes: (i) exempt banks with less than $10 billion in assets from the ability-to-repay
requirements for certain qualified residential mortgage loans held in portfolio; (ii) eliminate the requirement for appraisals for
certain transactions 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 Board of Governors of the Federal
Reserve System (“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
System (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 subsidiaries are subject to inspection, examination and supervision by the 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 (“non-member bank”).
7
Accordingly, the West Virginia Division of Financial Institutions and the FDIC are the primary regulators of the Bank and the
Bank's subsidiaries.
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 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. 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.
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
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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. 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.
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. Under the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its
home state by establishing a de novo branch at any location in such host state at which a bank chartered in such a host state could
establish a branch. Applications to establish such branches must be filed with the appropriate bank regulator(s).
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
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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 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.
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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”). 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. As of July 22, 2019, the effective date for the
rulemaking implementing the EGRRCPA exemption, the Company and the Bank are below these thresholds and thus exempt
from the Volcker Rule.
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 and the retained earnings
for the preceding two years, 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 Federal Deposit
Insurance Act (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
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(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.
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:
•
•
•
•
leverage ratio”).
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
The Capital Rules also include a new “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-
weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and
increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019. The Capital Rules also provide for a
“countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability
to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and
effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-
weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical
capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Since fully phased in on January 1, 2019, the Capital Rules require the Bank to maintain an additional capital conservation buffer
of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to
risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a
minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.
The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the
general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the
assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting
in higher risk weights for a variety of asset categories.
In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital
requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the
regulatory burden for such smaller financial institutions. In July 2019, the bank regulatory agencies finalized the rule which
applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign
exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the
capital instruments of unconsolidated financial institutions, and minority interest. The rule also allows bank holding companies to
redeem common stock without prior approval unless otherwise required. Generally, the final rule is effective as of April 1, 2020,
however banking organizations are permitted to use this simpler regulatory capital requirements as of January 1, 2020.
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In June 2016, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standards for credit losses
that included the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology
for certain financial assets. CECL became 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 (“CBLR”) (tangible equity to average
consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the
general applicable risk-based capital requirements under the Capital Rules. Such institutions that meet the CBLR will
automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may
not qualify for the CBLR test based on the institution’s risk profile. In November 2019, the federal bank regulators issued a final
rule on the CBLR, setting the minimum required CBLR at 9%. Depository institutions and depository institution holding
companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio
(equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR
framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9%
will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulators’ capital
rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the
FDIA. The final rule was effective on January 1, 2020 and the CBLR framework will be available for banks to use in their March
31, 2020 Call Report.
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 eliminated these requirements for banks with less than $10.0 billion in assets who elect to follow
the CBLR.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or
paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.”
“Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The
agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and
is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the
depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.
The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it
became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a
13
depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a
receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking
agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower
category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information
other than the capital levels of the institution.
In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a
variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of
deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see the discussion under the
section captioned “Capital/Stockholders’ Equity” included in Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Note 14, “Regulatory Capital Requirements” of the Notes to the Consolidated Financial
Statements 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.
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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, 2019, the Bank
held capital stock of FHLB in the amount of $15.0 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
Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home
Mortgage Disclosure Act (“HMDA”), 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.
The CFPB is a federal agency responsible for implementing 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 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 HMDA.
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
15
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 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
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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.
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
17
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. 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 subsidiaries, 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.
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 2019, 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 46.8% 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 75.2% 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.
Changes in U.S. trade policies and other factors beyond our control, including the imposition of tariffs and retaliatory
tariffs, may adversely impact our business, financial condition and results of operations.
Changes in U.S. trade policies and other factors beyond our control, including the imposition of tariffs and retaliatory tariffs, may
adversely impact our business, financial condition and results of operations.
Following the U.S. presidential election in 2016, there has been discussion and dialogue regarding potential changes to U.S. trade
policies, legislation, treaties and tariffs, including trade policies and tariffs affecting other countries, including China, the
European Union, Canada and Mexico and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed,
and additional tariffs and retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on
products and materials that our customers import or export could impact the prices of our customers’ products, which could
reduce demand for such products, reduce our customers’ margins, and adversely impact their revenues, financial results and
ability to service their debt. In addition, to the extent changes in the political environment have a negative impact on us or on the
markets in which we operate our business, results of operations and financial condition could be materially and adversely
impacted in the future.
Severe weather, natural disasters, pandemics, epidemics, acts of war or terrorism or other external events could have
significant effects on our business.
Severe weather and natural disasters, including tornados, drought and floods, epidemics and pandemics, acts of war or terrorism
or other external events or the fear of such events could have a significant effect on our ability to conduct business. 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.
Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any
such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our
financial condition and results of operations.
The coronavirus or COVID-19 pandemic, trade wars, tariffs, and similar events and disputes, domestic and international, have
adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates
have declined significantly. Such events also may adversely affect business and consumer confidence, generally. We and our
customers, and our respective suppliers, vendors and processors may be adversely affected. Any such adverse changes may
adversely affect our profitability, growth asset quality and financial condition.
The COVID-19 outbreak is ongoing, and its dynamic nature, including uncertainties relating to the ultimate geographic spread of
the virus, the severity of the disease, the duration of the outbreak, and actions that may be taken by governmental authorities to
contain the outbreak or to treat its impact. The Federal Reserve stated on February 28, 2020 that it was closely monitoring
coronavirus developments and their effects on the economic outlook, and would act appropriately to support the economy. On
March 3, 2020, the Federal Reserve reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. The Federal
Reserve also announced it was purchasing Treasury bills into the second quarter of 2020, conducting overnight repurchase
agreement operations at least through April 2020, and will continue to reinvest amounts of principal received by the Federal
Reserve on its portfolio of treasury and agency debt and mortgage-backed securities. Lastly, the Federal Reserve also reduced the
interest it pays on excess reserves from 1.60% to 1.10%. We expect that such reductions in interest rates will adversely affect our
net interest income and margins, and our profitability.
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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, 2019, $1.1 billion, or 77.7%, 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. Volatile interest rate
environments could increase this risk initially. However, past performance supports the Company's ability to fund the increase in
MVB Mortgage’s production.
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 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
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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 prepay, 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.
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.
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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
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growth and profitability, which, in turn, could have a material adverse effect on our business, financial condition and results of
operations.
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2019, we had $23.1 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.
We are focused on our long-term growth and have undertaken various new business initiatives, many of which involve activities
that are new to us, or in some cases, are in the early stages of development. From time to time, we may develop, grow and/or
acquire 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 for these products and services are not fully
developed. For example, the Company is involved in new innovative strategies to provide independent banking to corporate
clients throughout the United States by leveraging recent investments in Fintech. We also acquired Chartwell Compliance in
September of 2019 which provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise
risk management services that include consulting, outsourcing, testing and training solutions. Given our evolving business and
product diversification, these new initiatives may subject us to, among other risks, increased business, reputational and
operational risk, as well as more complex legal, regulatory and compliance costs and risks. Furthermore, the Bank has several
large depositor relationships that are concentrated in the Fintech industry and the loss of any relationship could force us to fund
our business through more expensive and less stable sources.
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, results
of operations and financial condition. All service offerings, including current offerings and those which may be provided in the
future, may become more risky due to changes in economic, competitive and market conditions beyond our control.
Our investments in financial technology companies and initiatives subject us to material financial, reputational and
strategic risks.
Our investments in various financial technology companies have had a significant impact on our results of operations, and we
anticipate they will continue to have a significant impact on our results of operations in the future. For any investments where we
have the ability to exercise significant influence but not control over the operating and financial policies of the investee are
accounted for using the equity method of accounting. For investments accounted for under the equity method, we would increase
or decrease our investment by our proportionate share of the investee’s net income or loss. For any investments where we are not
able to exercise significant influence over the investee are accounted for under ASU 2016-01, where changes in fair value
resulting from observable price changes arising from orderly transactions are recognized in net income. We also periodically
evaluate our investments for impairment. See Note 1, “Summary of Significant Accounting Policies” for more information.
Any earnings from our financial technology investments can be volatile and difficult to predict. Furthermore, we invest in many
of these financial technology companies for strategic purposes. Where we are a minority shareholder, we may be unable to
influence the activities of these organizations which could have an adverse impact on our ability to execute our strategic
initiatives and successfully develop and implement the banking platform we are developing with these and other partners.
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
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expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions,
including, among other things:
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Potential exposure to unknown or contingent liabilities of the target company.
Exposure to potential asset quality issues of the target company.
Potential disruption to our business.
Potential diversion of our management’s time and attention.
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, 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
23
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.
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 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
24
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.
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 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 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 still unclear in certain respects and,
while the Internal Revenue Service has issued proposed regulations with respect to the Tax Reform Act, many of the regulations
are not yet finalized and will require additional interpretation and implementation by the Internal Revenue Service, state tax
authorities and courts. 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 regulation, court decision, legislation or Internal Revenue Service interpretation could lessen or
increase the adverse (and positive) impacts of the Tax Reform Act, which in-turn could affect our current or future financial
statements.
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
25
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.
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 Bank 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
26
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.
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, 2019, 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.
General Risk Factors
The value of the securities in our investment securities portfolio may be negatively affected by disruptions in
securities markets.
27
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.
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 FASB 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 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.
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.
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 subsidiaries own or lease various other offices in the counties and cities in which they operate. As of December 31,
28
2019, 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.
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV.
On January 31, 2020, the Company closed one branch location in Morgantown, WV.
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 subsidiaries is
incorporated herein by reference from Note 4, “Premises and Equipment” 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 subsidiaries are subject to claims, asserted or
unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities
litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings
cannot be predicted with any certainty, and in the case of more complex legal proceedings, the results are difficult to predict at all.
The Company is not aware of any asserted or unasserted legal proceedings or claims that the Company believes would have a
material adverse effect on the Company’s financial condition or results of the Company’s operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
29
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.”
MVB Financial Corp. had 957 stockholders of record at March 12, 2020.
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, 2014, and the cumulative return is measured as of each subsequent fiscal year end.
Index
MVB Financial Corp.
KBW Bank Index
Russell 2000
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
100.00 $
100.00
100.00
87.93 $
98.41
94.29
86.46 $
123.61
112.65
135.69 $
143.70
127.46
122.62 $
115.53
111.94
169.25
152.65
138.50
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
None.
30
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 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
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
Bank Common equity tier 1 capital ratio
Bank Tier 1 risk-based capital ratio
Bank Total risk-based capital ratio
Bank Leverage ratio
2019
Years Ended December 31,
2017
2018
2016
2015
$
162,368
1,043,764
90,174
1,107,017
145,625
8,212,021
10,068,733
231,213
1,293,427
75,807
1,309,154
176,773
11,030,984
12,722,003
231,507
1,096,063
66,794
1,159,580
150,192
10,308,738
10,440,228
254,335
1,362,766
109,788
1,265,042
211,936
11,713,885
12,044,667
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
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
82,361 $
22,961
59,400
1,789
57,611
64,604
87,201
35,014
8,450
26,564
575
148
427
26,991
479
26,512
$ 1,944,114 $ 1,750,969 $ 1,534,302 $ 1,418,804 $ 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
11.45
11.45
12.19
9.50
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
13.34
13.34
14.22
10.69
2.22 $
0.04
2.26
2.16
0.04
2.20
0.20
17.13
15.20
0.37 %
0.34
0.07
0.86
1.44 %
0.02
13.61
0.22
8.48
70.32
10.90
12.05
12.05
12.84
9.94
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
12.47
12.47
13.29
10.24
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
13.60
13.60
14.46
10.88
$
31
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.
(Dollars in thousands except per share data)
2019
Years Ended December 31,
2017
2018
2016
2015
Non-GAAP Financial Measure Reconciliation
Goodwill
Intangibles
Total intangibles
Total Equity
Less: Preferred equity
Less: Total intangibles
Tangible common equity
19,630
3,473
23,103
211,936
(7,334)
(23,103)
181,499
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
181,499
11,944,289
15.20
149,909
11,607,293
12.92
123,232
10,444,627
11.80
18,480
744
19,224
145,625
(16,334)
(19,224)
110,067
110,067
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
32
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 subsidiaries (collectively, “we,” “our,” or “us”),
including the Bank; and
•
“anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook,” or similar expressions.
statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,”
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing our
view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known and
unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not limited to,
those presented in this Management’s Discussion and Analysis section. Factors that might cause such differences include, but are
not limited to:
our ability to successfully conduct acquisitions and integrate acquired businesses;
potential difficulties in expanding our businesses in existing and new markets;
increases in the levels of losses, customer bankruptcies, bank failures, claims, and assessments;
changes in fiscal, monetary, regulatory, trade and tax policies and laws, including the recently enacted Tax Reform Act,
our ability to successfully execute business plans, manage risks, and achieve objectives;
•
•
changes in local, national and international political and economic conditions, including without limitation changes in
the political and economic climate, economic conditions and fiscal imbalances in the United States and other countries, potential
or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major developments,
including wars, natural disasters, epidemics and pandemics, including the COVID-19 outbreak, military actions, and terrorist
attacks;
changes in financial market conditions, either internationally, nationally, or locally in areas in which we conduct
•
operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate
development, and real estate prices;
•
fluctuations in markets for equity, fixed-income, commercial paper, and other securities, including availability, market
liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios, demand
for loan products, deposit flows and competition;
•
•
•
•
and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Federal Reserve, and the FDIC;
•
the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact our
ability and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses
and competitiveness;
•
the impact of the Dodd-Frank Act and EGRRCPA, and rules and regulations thereunder, some of which have not yet
been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business
activities in which we may engage, the manner in which we engage in such activities, the fees that our subsidiaries may charge for
certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;
•
and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;
•
•
•
•
•
•
•
•
required by the FASB or regulatory agencies; and
•
success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
changes in consumer spending and savings habits;
increased competitive challenges and expanding product and pricing pressures among financial institutions;
inflation and deflation;
technological changes and our implementation of new technologies;
our ability to develop and maintain secure and reliable information technology systems;
legislation or regulatory changes which adversely affect our operations or business;
our ability to comply with applicable laws and regulations; changes in accounting policies or procedures as may be
continuing consolidation in the financial services industry; new legal claims against us, including litigation, arbitration
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
33
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 control over financial reporting and their independent audit reports are included elsewhere in this Annual
Report on Form 10-K.
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 this Management’s Discussion and Analysis, 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 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.
34
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
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 Company has chosen to measure the equity securities without readily determinable fair
values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for underlying
transactions for identical or similar investments of new issues.
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.
Pension Plan
As discussed in Note 10, “Pension Plan” 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 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%.
Deferred Tax Assets
The Company uses an estimate of future earnings to support our position that the benefit of 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
35
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.
Recent Accounting Pronouncements and Developments
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-14, Compensation – Retirement Benefits
– Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for
Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the
disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans.
Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure
requirements. The ASU removed the following disclosures: 1) the amounts in accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets
expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension
Insurance Law; 4) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts
and significant transactions between the employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of
the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy;
however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair
value hierarchy and purchases of Level 3 plan assets and 6) for public entities, the effects of a one-percentage-point change in
assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs
and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: 1) the weighted-
average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation
of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified
the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than
plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan
assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company
is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and
modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications
include additions, modification, and removal of disclosure requirements. The ASU removed the following disclosure
requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for
timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements, and 4) for nonpublic entities, the
changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at
the end of the reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and
losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the
reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or
arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more
reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a
nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of
Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose
the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee
has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty
disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective
for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The
Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update requires a reclassification
from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly
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
36
the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is the difference between the historical
corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which amounted to $646 thousand.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the
existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce
complexity in fair value hedges of interest-rate risk. The ASU eliminates the requirement to separately measure and report hedge
ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same
income statement line as the hedged item. The ASU also changes certain documentation and assessment requirements and
modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public
business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this
ASU in accordance with paragraph ASC 815-20-65-3 subpart C. The adoption of this ASU did not have a significant impact on
the Company’s financial condition, results of operations and consolidated financial statements. The Company can now employ
additional hedging strategies as described above, including the ability to apply fair value hedge accounting to a specified pool of
assets by excluding the portion of the hedged items related to prepayments, defaults and other events. This allows the Company to
better align its accounting and the financial reporting of its hedging activities with their economic objectives thereby reducing the
earnings volatility resulting from these hedging activities.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on
certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain
purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt
securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is,
at a premium). For public companies, this update is effective for fiscal years beginning after December 15, 2018, including all
interim periods within those fiscal years. The adoption of this guidance was not material to the consolidated financial statements,
as was always our current policy to amortize premiums of investment securities to the earliest call date.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. Topic 350, Intangibles – Goodwill and Other (Topic 350), currently requires an entity that has not elected
the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment.
In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying
amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill
with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the
carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the
amount of goodwill allocated to that reporting unit to address concerns over the cost and complexity of the two-step goodwill
impairment test. The amendments in this update remove the second step of the test. An entity will apply a one-step quantitative
test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to
exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative
assessment of goodwill impairment. For public companies, this update is effective for fiscal years beginning after December 15,
2019, including all interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance effective January 1,
2019 and 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 and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in
May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, and in November 2019, ASU 2019-10, Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification
and corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in
current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to
determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be
collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the
acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt
securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value
is below amortized cost. The guidance was initially effective for fiscal years beginning after December 15, 2019 and interim
periods within those fiscal years. The Company has formed an implementation team led by the CFO, that also includes other lines
of business and functions within the Company. The Company has also engaged a third party to assist with a data gap analysis and
will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired
software to assist in the development of models that can meet the requirements of the new guidance. While this standard may
37
potentially have a material impact on the Company’s consolidated financial statements, we are still in the process of completing
our evaluation. In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the
SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December
31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year
2019, the proposed delay would be applicable. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments –
Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay
in the effective date of the standard for smaller reporting companies until January 2023.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance in
September 2017, ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017
EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update), in January 2018, ASU
2018-10, Codification Improvements to Topic 842, Leases, in July 2018, ASU 2018-11, Leases (Topic 842): Targeted
Improvements, in December 2018, ASU 2019-01, Leases (Topic 842): Codification Improvements in March 2019, and in
November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and
Leases (Topic 842): Effective Dates. Among other things, in the amendments in ASU 2016-02, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability,
which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the
new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary,
lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in
this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
ASU 2016-02 initially required transition using a modified retrospective approach for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-
11, Leases (Topic 842) - Targeted Improvements, which, among other things, provides an additional transition method that would
allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In
December 2018, the FASB also issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements, for Lessors which
provides certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon the
adoption of ASU 2016-02, ASU 2018-11, and ASU 2018-20 on January 1, 2019, the Company recognized right-of-use assets and
related lease liabilities totaling $12.9 million and $15.7 million, respectively. The initial balance sheet gross up upon adoption
was primarily related to operating leases of certain real estate properties and financing leases of certain office equipment. The
Company has no material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company
applied certain practical expedients provided under ASU 2016-02 whereby the Company did reassess (i) whether any expired or
existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs
for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as
defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such
amounts are readily determinable under our lease contracts and because this election resulted in a lower impact on our balance
sheet. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and
Measurement (Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from
this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments (except those
accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair
value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do
not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar investment of the same issuer; 2) simplify the impairment assessment
of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment.
When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; 3)
eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to
be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other
comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-
specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for
financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial
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
38
impact on the Company’s Consolidated Financial Statements. In accordance with 4) above, the Company discloses the fair value
of its loan portfolio on a quarterly basis using an exit price notion.
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, 2019 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 $26.6 million in 2019 compared to $12.0 million in 2018, an increase of
$14.6 million. The 2019 earnings equated to a return on average assets of 1.44% and a return on average equity of 13.61%,
compared to 2018 results of 0.73% and 7.46%, respectively. Basic earnings per share were $2.22 in 2019 compared to $1.04 in
2018. Diluted earnings per share were $2.16 in 2019 compared to $1.00 in 2018.
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.
Net interest income increased $7.3 million, noninterest income increased $26.0 million, and noninterest expenses increased by
$14.3 million during 2019 compared to 2018. The Company’s yield on earning assets in 2019 was 4.81% compared to 4.58% in
2018. Total loans increased by $70.2 million to $1.4 billion at December 31, 2019.
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.
Deposits decreased $44.1 million to $1.3 billion at December 31, 2019, from $1.3 billion at December 31, 2018. 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 1.68% in 2019 compared to 1.37% in 2018. This cost of interest-bearing
liabilities, combined with the earning asset yield, resulted in a net interest margin of 3.47% in 2019 compared to 3.41% in 2018.
Deposits increased $149.6 million to $1.3 billion at December 31, 2018, from $1.2 billion at December 31, 2017. The overall cost
of interest-bearing liabilities for the Company was 1.37% in 2018 compared to 1.04% in 2017. Increasing the asset yield at a
faster pace than the cost of interest-bearing liabilities resulted in a net interest margin of 3.41% in 2018 compared to 3.27% in
2017.
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-
39
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 3.47% in 2019 compared to 3.41% and
3.27% in 2018 and 2017, respectively. The net interest margin continues to face considerable pressure due to falling interest rates
and competitive pricing of loans and deposits in the Bank’s markets. During 2019, the Federal Reserve lowered its key interest
rate from a range of 2.25% to 2.50% to a range of 1.50% to 1.75%. Management’s estimate of the impact of future changes in
market interest rates is shown in the section captioned “Interest Rate Risk.”
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 3.13% in 2019 compared to 3.21% and 3.13% in 2018 and 2017, respectively. The difference between the net
interest margin and net interest spread was 34 basis points in 2019 compared to 20 basis points in 2018. This was due to an
increase of $86.9 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 2019, net interest income increased by $7.3 million, or 14.1%, to $59.4 million from $52.1 million in 2018. This increase
is largely due to the growth in average earning assets, primarily $133.6 million in commercial loans. Average total earning assets
was $1.7 billion in 2019 compared to $1.5 billion in 2018. Average total loans and loans held for sale increased to $1.5 billion in
2019 from $1.3 billion in 2018, primarily as the result of a $133.6 million increase in average commercial loans. As a result of the
increase in average total earning assets, total interest income increased by $12.6 million, or 18.1%, to $82.4 million in 2019 from
$69.8 million in 2018. Average investment securities increased $3.5 million, as the result of a $20.6 million decrease in taxable
investments and a $24.1 million increase in tax-exempt investments. Yield on tax-exempt securities decreased 14 basis points and
taxable securities yield decreased 2 basis points. Average interest-bearing liabilities increased in 2019 by $68.9 million. The
increase was primarily the result of a $86.6 million increase in the average balance of money market checking accounts and a
$67.9 million increase in the average balance of certificates of deposit, partially offset by a $51.7 million decrease in the average
balance of NOW accounts, a $6.9 million decrease in the average balance of borrowings, a $7.3 million decrease in the average
balance of repurchase agreements and federal funds sold, and a $13.7 million decrease in the average balance of subordinated
debt due to redemptions and conversions into common stock. Average interest-bearing deposits grew to $1.2 billion in 2019 from
$1.1 billion in 2018. Total interest expense increased by $5.3 million, caused primarily by a $5.8 million increase in deposit
interest and a $445 thousand increase in interest on FHLB and other borrowings. The result was a 31-basis point increase in the
cost of interest bearing liabilities from 2018 to 2019.
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.
The Company’s average earning assets increased $188.8 million and net interest income increased by $7.3 million during 2019.
The net interest margin continues to be pressured by falling rates, increased competition for high quality loan growth and the
deposit volume required to fund the growth.
40
The Bank’s yield on earning assets changed during 2019 as follows: the loan portfolio yield increased by 23 basis points and the
investment portfolio yield increased by 4 basis points while the cost of interest bearing liabilities increased by 31 basis points.
The cost of interest-bearing liabilities increased to 1.68% in 2019 from 1.37% in 2018. This increase is primarily the result of a 33
basis point increase in the cost of borrowings and a 29 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.
41
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:
2019
2018
2017
Average
Balance
Interest
Income/Expense Yield/Cost
Average
Balance
Interest
Income/Expense Yield/Cost
Average
Balance
Interest
Income/Expense Yield/Cost
(Dollars in thousands)
Assets
Interest-bearing
deposits in banks
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
$
9,264 $
14,097
129,486
103,235
987,674
12,549
447,891
8,948
1,457,062
1,713,144
(11,318)
17,625
131,370
$ 1,850,821
Liabilities
Deposits:
NOW
Money market
checking
Savings
IRAs
CDs
Repurchase agreements
and federal funds sold
FHLB and other
borrowings
Subordinated debt
Total interest-
bearing liabilities
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
Total liabilities and
stockholders’ equity
Net interest spread
Net interest income-
margin
$ 381,092 $
331,636
38,324
17,415
387,660
11,252
183,812
12,124
1,363,315
258,546
33,810
1,655,671
7,660
11,762
118,837
(1,084)
61,712
(3,737)
195,150
$ 1,850,821
209
280
2.26 % $
1.99
5,176 $
14,778
108
295
2.09 % $
2.00
3,790 $
14,619
52
288
1.37 %
1.97
2,658
1,863
33,896
520
16,612
709
51,737
56,598
2.11
3.17
4.51
3.45
4.45
5.19
4.49
4.17
2,608
1,781
78
217
3,610
75
1,690
2,242
12,301
0.60
0.74
0.17
1.30
1.38
0.32
1.38
6.69
1.04
3,055
3,520
53,087
443
21,220
547
75,297
82,361
2.36
3.41
5.37
3.53
4.74
6.11
5.17
4.81
3,586
5,144
4
329
8,376
48
4,704
770
22,961
0.94
1.55
0.01
1.89
2.16
0.43
2.56
6.35
1.68
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
1,294,456
171,631
10,304
1,476,391
7,834
11,082
107,669
(1,084)
42,509
(7,143)
160,867
$ 1,637,258
3,580
2,810
43,099
499
18,794
575
62,967
69,760
2.38
3.55
5.05
3.48
4.75
5.07
4.94
4.58
3,246
2,455
29
285
5,620
56
4,259
1,756
17,706
0.75
1.00
0.07
1.59
1.76
0.30
2.23
6.81
1.37
125,797
58,786
751,444
15,064
373,360
13,660
1,153,528
1,356,520
(9,626)
16,287
90,585
$ 1,453,766
$ 438,123 $
239,632
47,034
16,678
262,417
23,559
122,144
33,524
1,183,111
117,696
8,006
1,308,813
7,927
10,355
96,987
(1,084)
34,155
(3,387)
144,953
$ 1,453,766
$
59,400
3.13
3.47 %
$
52,054
3.21
3.41 %
$
44,297
3.13
3.27 %
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
42
Rate Volume Calculation: 2019 vs. 2018
(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
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
6,740 $
(63)
2,501
(122)
(492)
855
85
(14)
9,490 $
(388) $
868
(4)
(8)
1,194
(22)
(154)
(930)
556 $
8,934 $
2,809 $
8
(66)
119
(38)
(111)
9
(1)
2,729 $
827 $
1,345
(24)
53
1,288
23
621
(119)
4,014 $
(1,285) $
439 $
(1)
(9)
(25)
5
(34)
7
—
382 $
(99) $
476
3
(1)
274
(9)
(22)
63
685 $
(303) $
9,988
(56)
2,426
(28)
(525)
710
101
(15)
12,601
340
2,689
(25)
44
2,756
(8)
445
(986)
5,255
7,346
Change in
Volume
Change in Rate
Change in Both
Rate & Volume Total Change
4,631 $
(25)
976
(120)
514
645
19
3
6,643 $
(32) $
40
(5)
16
788
(16)
948
(518)
1,221 $
5,422 $
4,022 $
4
1,139
(17)
342
224
27
4
5,745 $
678 $
620
(47)
48
1,003
(4)
1,038
42
3,378 $
2,367 $
550 $
—
67
3
66
78
10
—
774 $
(8) $
14
3
4
219
1
583
(10)
806 $
(32) $
9,203
(21)
2,182
(134)
922
947
56
7
13,162
638
674
(49)
68
2,010
(19)
2,569
(486)
5,405
7,757
$
$
$
$
$
$
$
$
$
$
43
Provision for Loan Losses
The Company’s provision for loan losses for 2019, 2018, and 2017 was $1.8 million, $2.4 million and $2.2 million, respectively.
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 $1.8 million and $2.4 million were made for the year ended December 31, 2019 and 2018,
respectively. The decrease in loan loss provision is most attributable to the relative lower growth in the loan portfolios, which
increased $69.7 million during 2019 versus a $199.3 million increase during 2018. The total decrease in provision was also
significantly impacted by the continued decline in historical loss rates, and a decrease in the need for ASC 310-10 specific loan
loss allocations, during 2019. More specifically, total loan portfolio growth was 5.4% in 2019 versus 17.9% in 2018, while total
specific loan loss allocations for impaired loans decreased by $469 thousand in 2019, versus a decrease of $145 thousand in 2018.
Total net charge-offs were $953 thousand in 2019, compared to $1.4 million in 2018.
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.
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 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, holding gain on equity securities, commercial swap fee income, gain (loss) on derivatives and income on
bank owned life insurance 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 2019, 2018 and
2017 was $64.6 million, $38.6 million and $40.7 million, respectively.
The increase in noninterest income for 2019 compared to 2018 was primarily the result of a $13.2 million increase in net holding
gains on equity securities and a $8.7 million increase in mortgage fee income. The increase of $13.2 million in holding gain on
equity securities was mainly the result of a holding gain of $13.5 million relating to a Fintech investment. The increase in
mortgage fee income was largely the result of an increase of $342.9 million, or 27.0%, in the volume of mortgage loans sold
which was driven by an increase of $368.7 million, or 25.5%, in mortgage closed loan production volume. Excluding the
increases in holding gain on equity securities and mortgage fee income, noninterest income for 2019 increased $4.1 million and
was primarily attributed to an increase in the gain on derivative of $1.5 million and an increase in commercial swap fee income of
$1.2 million.
In 2019 and 2018, mortgage fee income increased $8.7 million and decreased $4.8 million, respectively. Mortgage closed loan
production volume increased by $368.7 million, or 25.5%, in 2019 and decreased $93.8 million, or 6.1%, in 2018. With the
pressure of decreasing rates during 2019, mortgage closed loan production increased in 2019 across most of the loan categories.
The $368.7 million increase in 2019 was due to a $352.0 million increase in refinance volume, a $59.8 million increase in
purchase loans, a $1.4 million increase in bridge loans, and a $44.5 million decrease in construction loans. The decrease in 2018
was due to a $46.9 million decrease in purchase loans, a $35.4 million decrease in refinance volume, an $8.8 million decrease in
bridge loans, and a $2.7 million decrease in construction loans, which was a result of increasing interest rates in 2018.
Gain on derivatives increased $1.5 million from a loss of $278 thousand in 2018 to a gain of $1.3 million in 2019. This increase
was largely the result of an increase of 23.39% in the locked pipeline of residential mortgage loans related to the derivative during
the year ended December 31, 2019, compared to a decrease of 3.15% in the locked pipeline of residential mortgage loans related
to the derivative during the year ended December 31, 2018.
44
Commercial swap fee income increased $1.2 million from $552 thousand in 2018 to $1.7 million in 2019. This was primarily the
result of an increase in swap volume from $38.5 million in 2018 to $58.3 million in 2019.
During the ordinary course of business in 2019, 2018 and 2017, the Company sold several investment securities at a loss of $166
thousand, a gain of $327 thousand and a gain of $731 thousand, 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 increased $322 thousand from $198 thousand in 2018 to $520 thousand in 2019 and decreased
$340 thousand from $538 thousand in 2017 to $198 thousand in 2018. The total volume of portfolio loans sold in 2019, 2018 and
2017 was $63.9 million, $15.2 million, and $52.9 million, respectively.
The Company is continually searching for ways to increase noninterest income. In addition, the Company believes that the
acquisition of Chartwell Compliance during the third quarter of 2019 will generate increases to noninterest income through
consulting income generated from their services.
Noninterest Expense
Noninterest expense was $87.2 million, $72.9 million and $70.5 million in 2019, 2018 and 2017, respectively. Approximately
64%, 63% and 63% of noninterest expense for 2019, 2018 and 2017, 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 $10.0 million in 2019 and increased by $2.1 million in 2018. The 2019 increase is primarily the
result of increased mortgage production, the build-out of other Company administration, the build-out of the Fintech team,
increased incentive and stock-based compensation, and the additional team members acquired as a result of the Chartwell
acquisition during the third quarter of 2019. 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.
Equipment and occupancy expense increased by $983 thousand in 2019 and by $384 thousand in 2018. The 2019 increase was
mainly due to increases in lease expense, building repairs and maintenance, maintenance on equipment and technology. 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 consolidation of two branches in Martinsburg, WV during December of 2017.
Professional fees increased by $1.4 million in 2019 and increased by $416 thousand in 2018. The 2019 increase was due to
special projects and Fintech product and technology development. The 2018 increase was due to project management, additional
accounting and auditing fees, recruiting expenses, and other efficiency implementations.
Travel, entertainment, dues, and subscriptions expense increased by $1.3 million in 2019 and by $587 thousand in 2018. More
specifically, the 2019 increase was mainly due to a $1.0 million increase in meals and entertainment and a $835 thousand increase
in travel expense, primarily the result of increased activity of the Fintech team. The 2018 increase was primarily due to a $386
thousand increase in travel expense, and a $288 thousand increase in publications and sponsorships.
Income Taxes
The Company incurred income tax expense of $8.6 million, $3.4 million, and $4.8 million in 2019, 2018, and 2017, respectively.
The Company’s effective tax rate was 24%, 22%, and 39% in 2019, 2018 and 2017, respectively. The decrease in effective tax
rate for 2018 and 2019 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 Company's 2017 effective tax rate was also
affected by the Tax Reform Act, as the Company was required to re-measure its net deferred tax asset, which 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
45
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 1.44% in 2019,
compared to 0.73% in 2018 and 0.52% in 2017. The increased return in 2019 is a direct result of a $14.6 million increase in
earnings from continuing operations, while average total assets increased by $213.6 million, mainly as the result of a $182.0
million increase in average total loans. 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 average investment securities.
Return on Equity
Excluding discontinued operations, the Company’s return on average stockholders’ equity from continuing operations was
13.61% in 2019, compared to 7.46% in 2018 and 5.23% in 2017. The increased return in 2019 is a direct result of a $14.6 million
increase in earnings from continuing operations, while average equity increased by $34.3 million. 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.
Overview of the Statement of Condition
The greatest balance sheet changes from 2018 to 2019 were as follows: total assets increased by $193.1 million to $1.9 billion at
December 31, 2019, loans increased by $70.2 million to $1.4 billion, deposits decreased by $44.1 million to $1.3 billion, accrued
interest payable and other liabilities increased $24.0 million to $41.7 million, accrued interest receivable and other assets
increased $18.9 million to $53.1 million, subordinated debt decreased $13.4 million to $4.1 million, and stockholders’ equity
increased $35.2 million to $211.9 million.
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. Further discussion of this agreement,
including the amounts classified as held for sale at December 31, 2019, is included 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.
Cash and Cash Equivalents
Cash and cash equivalents totaled $28.0 million at December 31, 2019, compared to $22.2 million at December 31, 2018. During
2016, a deposit reclassification program was implemented and allowed the Company to reduce its requirement of reserve balances
on hand in accordance with the Federal Reserve Board 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.
46
Investment Securities
Investment securities totaled $254.3 million at December 31, 2019, compared to $231.2 million at December 31, 2018.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated 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
Equity securities
2019
2018
2017
$
$
$
51,996 $
58,312
113,092
12,421
235,821 $
77,430 $
50,115
83,761
10,308
221,614 $
80,945
58,154
75,842
16,566
231,507
18,514 $
9,599 $
—
At December 31, 2019, 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, 2019, the amortized cost of available-for-sale investment securities totaled $231.8
million, resulting in unrealized gain in the investment portfolio of $4.0 million. 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.
The following table shows the maturities for the available-for-sale investment securities portfolio at December 31, 2019:
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
(Dollars in
thousands)
U. S. Agency
securities
U.S. Sponsored
Mortgage-
backed
securities
Municipal
securities
Other securities
Total
$
$
—
—
—
90
90
— % $ 13,997
2.06 % $ 14,707
2.38 % $ 23,342
2.52 % $ 52,046 $ 51,996
—
—
—
11,098
1.74
47,650
2.58
58,748
58,312
—
961
985
5.02
5.02 % $ 15,943
2.69
9,294
10,319
2.46
2.12 % $ 45,418
3.44
98,495
853
5.37
3.12 % $ 170,340
3.35
108,750
113,092
12,421
12,247
3.79
3.02 % $ 231,791 $ 235,821
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 $1.4 billion as of December 31, 2019 and $1.3 billion as of December 31, 2018.
During 2019, the Bank experienced loan growth of $70.2 million. The growth primarily came from the commercial and non-
residential real estate area, which grew approximately $122.8 million.
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
47
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. As of December 31, 2019, the balance of
loans classified as held for sale as a result of this agreement was $42.9 million.
Major classification of loans held for investment at December 31, are as follows:
(Dollars in thousands)
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
306,710
3,697
2019
$ 1,063,828 $
2018
941,033 $
353,944
9,605
2015
728,202
285,490
17,361
$ 1,374,235 $ 1,304,582 $ 1,105,306 $ 1,051,968 $ 1,031,053
$
1,117
$ 1,374,541 $ 1,304,366 $ 1,105,941 $ 1,052,865 $ 1,032,170
2017
783,909 $
308,614
12,783
2016
756,619 $
280,838
14,511
(216) $
306 $
897 $
635 $
At December 31, 2019, commercial and non-residential real estate loans represented the largest portion of the portfolio
approximating 77.4% of the total loan portfolio. Commercial and non-residential real estate loans totaled $1.1 billion at
December 31, 2019, compared to $941.0 million at December 31, 2018. 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 22.3% of the total loan portfolio. Residential real estate and home equity loans totaled $306.7
million at December 31, 2019, compared to $353.9 million at December 31, 2018. Included in residential real estate loans are
home equity credit lines totaling $35.1 million at December 31, 2019, compared to $59.0 million at December 31, 2018.
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 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, 2019, consumer and other loan balances totaled $3.7 million compared to $9.6 million at December 31, 2018.
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, 2019, loans identified by management as potential problem loans amounted to $10.0 million, which includes
three commercial relationships. The five loans among these relationships include $6.0 million in three commercial equipment
loans to one borrower, a $2.2 million commercial real estate loan to the second borrower, and a $1.8 million government lease
finance loan to a third borrower. 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 in the future. These loans are
being monitored closely, but as of year-end were not considered impaired loans.
The following table provides additional information about loans:
Loan maturities at December 31, 2019:
(Dollars in thousands)
Commercial and non-residential real estate
Residential real estate and home equity
Consumer and other
Total Loans
$
$
One Year
or Less
182,739 $
135,523
434
318,696 $
One Through
Five Years
Total
Due After Five
Years
526,802 $ 1,063,828
306,710
158,301
3,697
1,748
686,851 $ 1,374,235
354,287 $
12,886
1,515
368,688 $
The preceding data has been compiled based upon the earlier of either contractual maturity or next repricing date.
48
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2019 that mature after one
year:
(Dollars in thousands)
Predetermined fixed interest rate
Floating or adjustable interest rate
Total as of December 31, 2019
Loan Concentration
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
$
$
420,946 $
460,143
881,089 $
136,414 $
34,773
171,187 $
2,720 $
543
3,263 $
Total
560,080
495,459
1,055,539
At December 31, 2019, 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, 2019 and 2018, impaired loans totaled $9.5 million and $12.8 million, respectively. A portion of the ALL of
$574 thousand and $1.0 million was allocated to cover any loss in these loans at December 31, 2019 and 2018, respectively.
Loans past due more than 30 days were $9.3 million and $16.2 million, respectively, at December 31, 2019 and 2018.
Loans past due more than 30 days to gross loans
Loans past due more than 90 days to gross loans
2019
0.68 %
0.07 %
December 31,
2018
1.24 %
0.40 %
2017
0.89 %
0.25 %
Net charge-offs of $953 thousand in 2019, $1.4 million in 2018, and $1.4 million in 2017 were incurred. The provision for loan
losses was $1.8 million in 2019, $2.4 million in 2018, and $2.2 million in 2017. Net charge-offs represented 0.07%, 0.11%,
0.13%, 0.24% and 0.07% in 2019, 2018, 2017, 2016 and 2015, respectively, compared to gross loans for the indicated period.
The following tables reflect the allocation of the ALL as of December 31, 2019, 2018, 2017, 2016 and 2015:
(Dollars in thousands)
ALL balance at December 31, 2018
Charge-offs
Recoveries
Provision (Recovery)
ALL balance at December 31, 2019
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
$
$
8,605 $
(998)
1
2,490
10,098 $
2,089 $
—
5
(495)
1,599 $
245 $
(10)
49
(206)
78 $
10,939
(1,008)
55
1,789
11,775
49
(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 (Recovery)
ALL balance at December 31, 2015
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
$
$
7,804 $
(1,024)
15
1,810
8,605 $
1,824 $
(166)
81
350
2,089 $
250 $
(290)
5
280
245 $
9,878
(1,480)
101
2,440
10,939
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
$
$
7,181 $
(1,138)
39
1,722
7,804 $
1,718 $
(250)
44
312
1,824 $
202 $
(109)
18
139
250 $
9,101
(1,497)
101
2,173
9,878
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
$
$
6,066 $
(1,995)
8
3,102
7,181 $
1,810 $
(224)
11
121
1,718 $
130 $
(338)
1
409
202 $
8,006
(2,557)
20
3,632
9,101
Commercial and
Non-Residential
Real Estate
Residential Real
Estate and Home
Equity
Consumer and
Other
Total
$
$
4,363 $
(708)
20
2,391
6,066 $
1,653 $
(33)
6
184
1,810 $
207 $
(6)
11
(82)
130 $
6,223
(747)
37
2,493
8,006
(Dollars in thousands)
2019
2018
2017
2016
2015
% 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
Amount
$ 10,098
78 % $ 8,605
72 % $ 7,804
71 % $ 7,181
72 % $ 6,066
1,599
78
$ 11,775
2,089
22
—
245
100 % $ 10,939
27
1
1,824
250
100 % $ 9,878
28
1
1,718
202
100 % $ 9,101
27
1
1,810
130
100 % $ 8,006
% of
loans in
each
category
to total
loans
70 %
28
2
100 %
December 31,
Commercial and non-
residential real estate
Residential real estate and
home equity
Consumer and other
Total
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 2019, interest income on loans would have increased by
approximately $582 thousand if loans had performed in accordance with their terms.
50
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
2019
2018
2017
2016
2015
$
$
$
3,533 $
1,556
34
5,123
—
5,123
1,397
6,520 $
4,495 $
2,526
82
7,103
—
7,103
2,145
9,248 $
8,350 $
1,170
179
9,699
—
9,699
1,346
11,045 $
4,975 $
1,176
78
6,229
—
6,229
414
6,643 $
8,195
839
371
9,405
848
10,253
239
10,492
11,775 $
10,939 $
9,878 $
9,101 $
8,006
Nonperforming loans to gross loans
Allowance for loan losses to non-performing loans
Nonperforming assets to total assets
0.37 %
229.85 %
0.34 %
0.54 %
154.01 %
0.53 %
0.88 %
101.85 %
0.72 %
0.59 %
146.11 %
0.47 %
0.99 %
78.08 %
0.76 %
Impaired loans have decreased by $3.3 million, or 25.8%, during 2019. This change is the net effect of multiple factors, including
principal curtailments of $1.6 million, the reclassification of $1.4 million of previously reported impaired loans to performing
loans, partial charge-offs of $999 thousand, the identification of $223 thousand of recently impaired loans, foreclosure and
reclassification to other real estate owned of $135 thousand, and normal loan amortization of $474 thousand.
The $1.6 million of principal curtailments were concentrated in one commercial relationship in which the underlying assets were
purchased by an unrelated borrower and repurposed in a new business operation, with stronger performance, allowing the new
loan to be originated as a performing loan. This relationship represented $1.4 million, or 88%, or the total principal curtailments.
The $1.4 million included in the reclassification of previously reported impaired loans to performing loans was concentrated in
one residential real estate loan that returned to accrual status after that borrower provided six consecutive, on-time payments, thus
allowing the loan to be adjusted to accrual status, and allowing the loan to be considered a performing loan.
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, including deposits at branches held for sale, continue to be the
most significant source of funds, totaling $1.5 billion, or 84.2%, of funding sources at December 31, 2019. This same information
at December 31, 2018, reflected $1.3 billion in deposits representing 84.1% of such funding sources. FHLB and other borrowings
and subordinated debt represented 15.1% and 14.9% of funding sources at December 31, 2019 and 2018, respectively.
Repurchase agreements, which are available to large corporate customers, represented 0.7% and 1.0% of funding sources at
December 31, 2019 and 2018, respectively, and 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 provided an annual
interest expense savings of $1.1 million. In 2019, $1.0 million of subordinated debt was converted into common stock, which
resulted in the issuance of 62,500 new shares, and $12.4 million of subordinated debt was redeemed. These transactions provided
an annual interest expense savings of $970 thousand.
Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the
Company. At December 31, 2019, noninterest-bearing balances totaled $278.5 million compared to $213.6 million at
December 31, 2018, or 22.0% and 16.3% of total deposits, respectively. Interest-bearing deposits totaled $1.0 billion at
December 31, 2019, compared to $1.1 billion at December 31, 2018, or 78.0% and 83.7% of total deposits, respectively.
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. As of December 31, 2019, the balance of
deposits classified as held for sale as a result of this agreement was $188.3 million.
51
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2019, 2018 and
2017:
(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
125,963
436,303
284,795
312,519
$ 1,265,042 $ 1,309,154 $ 1,159,580
278,547 $
351,435
363,026
272,034
213,597 $
376,398
317,697
401,462
2018
2017
2019
$
Time deposits that meet or exceed the FDIC insurance limit
$
8,955 $
15,280 $
18,832
The following table sets forth the average balance and average rate paid on each of the deposit categories, including the deposits
at branches held for sale, for the years ended December 31, 2019, 2018 and 2017:
2019
2018
2017
(Dollars in thousands)
Noninterest bearing demand deposits
Interest-bearing demand deposits:
NOW
Money market checking
Savings
IRAs
CDs
Total interest-bearing deposits
Total deposits
Average
Balance
258,546
$
Average Rate
Average Rate
Average
Balance
171,631
$
Average
Balance
117,696
Average Rate
$
381,092
331,636
38,324
17,415
387,660
1,156,127
$ 1,414,673
0.94 %
1.55 %
0.01 %
1.89 %
2.16 %
1.51 %
432,789
245,008
44,049
17,894
319,720
1,059,460
$ 1,231,091
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
$ 1,121,580
0.60 %
0.74 %
0.17 %
1.30 %
1.38 %
0.83 %
Average interest-bearing deposits, including deposits at branches held for sale, totaled $1.2 billion during 2019 compared to $1.1
billion during 2018. Average noninterest bearing deposits, including noninterest bearing deposits at branches held for sale, totaled
$258.5 million during 2019 compared to $171.6 million during 2018.
Maturities of time deposits, including time deposits at branches held for sale, that meet or exceed the FDIC insurance limit as of
December 31, 2019:
(Dollars in thousands)
Under 3 months
Over 3-12 months
Over 1 to 3 years
Over 3 years
Total
1,831
6,899
3,214
—
11,944
2019
$
$
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
$
2019
192,063 $
187,226
240,811
2.24 %
1.81 %
2018
212,395 $
171,117
264,297
2.27 %
2.62 %
2017
149,596
100,969
220,097
1.16 %
1.61 %
52
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
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
$
$
2019
2018
2017
10,172 $
11,252
14,655
0.43 %
0.44 %
14,925 $
18,536
20,903
0.30 %
0.16 %
22,403
25,160
25,972
0.30 %
0.34 %
2019
2018
2017
4,124 $
12,125
17,524
6.35 %
3.51 %
17,524 $
25,774
33,524
6.81 %
6.57 %
33,524
33,524
33,524
6.69 %
6.70 %
During the year ended December 31, 2019, stockholders’ equity increased approximately $35.2 million to $211.9 million. This
increase consists of net income for the year of $27.0 million, a $5.5 million decrease in other comprehensive loss, common stock
options exercised totaling $2.2 million, stock based compensation of $1.8 million, common stock issued related to Chartwell
acquisition totaling $1.0 million, and the conversion of subordinated debt to common stock totaling $1.0 million. These changes
were offset by preferred stock redemption of $500 thousand and dividends paid totaling $2.8 million. With the stockholders’
equity increasing as noted above, the equity to assets ratio increased 0.80% to 10.90% due to equity growth outpacing the $193.1
million increase in total assets during 2019. The Company paid dividends to common shareholders of $2.3 million in 2019 and
$1.2 million in 2018 and earned $27.0 million in 2019 versus $12.0 million in 2018, resulting in the dividend payout ratio
decreasing from 10.16% in 2018 to 8.48% in 2019.
At December 31, 2019, accumulated other comprehensive loss totaled $1.3 million, a decrease in the loss of $5.5 million from
December 31, 2018. This change is primarily the result of the increase in the market value of the investment portfolio from 2018
to 2019, principally in the area of municipal securities.
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.
The Bank is required to comply with applicable capital adequacy standards established by the FDIC. 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. 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.
At December 31, 2019, the Bank’s risk-based capital ratios were above the minimum standards for a well-capitalized institution.
The total risk-based capital ratio of 12.8% at December 31, 2019, is above the well capitalized standard of 10%. The Tier 1 risk-
based capital ratio of 12.1% at December 31, 2019 also exceeded the well capitalized minimum of 8%. The common equity tier 1
capital ratio of 12.1% at December 31, 2019 is above the well capitalized standard of 6.5%. The leverage ratio at December 31,
2019 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.
53
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 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 of Directors 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, 2019, the Company is shown in an asset 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
54
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.
Estimated Changes in Net Interest Income
Change in interest rates
Policy Limit
December 31, 2019
December 31, 2018
+400 bp +300 bp +200 bp +100 bp
10.0 %
0.3 %
(0.7) %
25.0 %
5.7 %
0.8 %
20.0 %
3.5 %
0.3 %
15.0 %
1.3 %
(0.7) %
-100 bp
-200 bp
-300 bp
-400 bp
10.0 %
(6.9) %
(2.9) %
15.0 %
(18.4) %
(8.2) %
20.0 %
(26.8) %
(16.9) %
25.0 %
(32.5) %
(21.6) %
As shown above, measures of net interest income at risk in a rising rate environment were more favorable at December 31, 2019
versus December 31, 2018 and less favorable in a falling rate environment for the same time periods. One factor explaining this
year-over-year difference is the general level of market interest rates. Relevant market yields were generally lower across the
yield curve at December 31, 2019 versus December 31, 2018. As a result, spreads on asset yields relative to liability yields have
compressed. A parallel downward interest rate shock would further compress the yields on assets and liabilities, while a parallel
upward interest rate shock would widen the spread between yields on assets and liabilities.
Net interest income at risk exceeded policy limits in the -200 bp, -300 bp, and -400 bp parallel instantaneous interest rate shock
scenarios. The policy violations in these scenarios are driven largely by the general level or market interest rates described in the
preceding paragraph as well as the Company's cost of funding. The Company's deposit costs are low and have little room to
reprice to a lower interest rate in a falling rate environment. However, the Company's floating rate assets are exposed to the full
effect of repricing to a lower interest rate in a falling rate environment.
The paragraph above discusses net interest income at risk in various shock scenarios; scenarios in which interest rates
immediately move by a large margin. Our net interest income profile exhibits declining net interest income when rates fall
gradually, but the impact is not as extreme as is suggested in a shock scenario. Essentially, a gradual interest rate decline scenario
smooths the impact of falling rates over a 12 or 24 month period. Our expectation is that over any given one to two year horizon,
interest rates will likely move at a gradual pace.
As interest rates fall, MVB Mortgage experiences a higher volume of loan originations and refinance activity. This benefit is not
reflected in measures of net interest income at risk, as origination and refinance activity at MVB Mortgage is classified as fee
income. This increase in fee income represents a benefit to net income that offsets the losses to net interest income experienced in
a falling rate environment.
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
Policy Limit
December 31, 2019
December 31, 2018
+400 bp +300 bp +200 bp +100 bp
12.0 %
5.0 %
(2.0) %
35.0 %
10.6 %
(8.2) %
25.0 %
8.6 %
(6.4) %
17.0 %
6.7 %
(4.3) %
-100 bp
-200 bp
-300 bp
-400 bp
12.0 %
(15.1) %
(2.7) %
17.0 %
(36.8) %
(11.9) %
25.0 %
(44.1) %
(27.6) %
35.0 %
(32.5) %
(33.3) %
The EVE at risk in down rate scenarios increased at December 31, 2019, when compared to December 31, 2018. EVE is
positioned to increase in rising rate environments at December 31, 2019 compared to December 31, 2018. The increase in
economic value of equity in rising rate environments is largely attributable to the effect that an increase in interest rates has on the
present value of non-interest-bearing deposits. The discount rate for non-interest-bearing deposits rises as interest rates rise.
However, these deposits pay a rate of zero. The cost of these liabilities does not increase as interest rates rise, but the discount rate
applied to the expected future cash flows of these liabilities increases with interest rates. Any increase in the market rates used to
discount the cash flows of these liabilities reduces the present value of these liabilities. The decrease in present value of these
liabilities results in a net increase to economic value of equity. A falling rate environment would result in a higher net present
value for these liabilities and would lead to a net decrease to economic value of equity.
Additionally, interest-bearing-deposits contribute to the large declines in economic value of equity in falling rate environments as
a result of their low cost. Interest-bearing-deposit costs are modeled with a floor of zero, meaning that the interest rates paid on
55
deposits cannot be negative. In the event of a large downward interest rate shock, deposit costs would floor at zero. However, the
discount rates applied to the expected future cash flows of these deposits could sustain a large decline in interest rates before
reaching zero. This has the effect of increasing the present value of the interest-bearing-deposit liability and ultimately decreasing
economic value of equity.
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, 2019, cash provided by financing activities totaled $133.9 million, while outflows from investing activity totaled
$120.1 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from
the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and
CDARS. These external sources often provide attractive interest rates and flexible maturity dates that enable the Bank to match
funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can
be utilized as an additional source of liquidity.
The Company has an effective shelf registration covering $75 million of debt and equity securities, of which approximately $75
million remains available, subject to authorization from the Board of Directors 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.
Contractual Obligations
The following table reflects the contractual maturities of our term liabilities as of December 31, 2019. 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
Finance leases
FHLB short-term advances
FHLB long-term advances
Total
$
Less than one
year
223,633 $
10,172
1,891
77
192,063
30
427,866 $
One to three
years
29,569 $
—
3,522
128
—
20,792
54,011 $
Three to five
years
18,832 $
—
2,823
—
—
10,000
31,655 $
$
More than
five years
Total
272,034
10,172
18,236
205
192,063
30,822
523,532
— $
—
10,000
—
—
—
10,000 $
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.
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
56
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, 2019, 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 2019 net income was $4.1 million compared to $3.0 million in the fourth quarter of 2018. This equated to basic
earnings per share, on a quarterly basis, of $0.34 in 2019 and $0.25 in 2018. Diluted earnings per share for the fourth quarter of
2019 and 2018 were $0.32 and $0.24, respectively. Net interest income increased during the fourth quarter and was $15.9 million
in the fourth quarter of 2019 compared to $14.4 million in 2018. Noninterest income was $14.8 million in the fourth quarter of
2019 compared to $8.3 million in 2018. Noninterest expense increased to $25.0 million for the fourth quarter of 2019 from $18.5
million in 2018. Loan loss provision was $232 thousand for the fourth quarter of 2019, a decrease of $60 thousand over the fourth
quarter of 2018.
The commercial and retail banking segment of the Company had decreased earnings in the fourth quarter of 2019 by $513
thousand from the same period one year prior due to an increase in noninterest expenses. Net interest income increased $1.2
million due to the Company’s strong balance sheet growth, namely loan growth of $147.9 million and deposit growth of $149.3
million. Noninterest income increased $2.4 million, primarily as the result of an increase of $1.0 million in compliance consulting
income related to Chartwell, an increase of $437 thousand in commercial swap fee income, an increase of $311 thousand in the
gain on sale of portfolio loans, and an increase of $132 thousand in service charges on deposit accounts. Noninterest expenses
increased by $4.5 million, mostly as the result of a $1.7 million increase in salaries and employee benefits, a $908 thousand
increase in professional fees, a $552 thousand increase in travel, entertainment, dues, and subscriptions, a $447 thousand increase
in other operating expenses, and $257 thousand increase in insurance, tax, and assessment expense. Additionally, fourth quarter
2019 income tax expense decreased by $128 thousand to $1.2 million versus the fourth quarter 2018.
The mortgage segment of the Company had decreased fourth quarter earnings of $1.5 million from the same period one year prior
due to an increase in mortgage fee income of $5.2 million and a decrease in the gain on derivatives of $708 thousand. Salaries and
benefits decreased $2.3 million as a result of decreased commission expense. In addition, there was an increase in income tax
expense of $558 thousand due to the increase in fourth quarter 2019 earnings versus the prior year.
The financial holding company segment of the Company had decreased earnings of $97 thousand in the fourth quarter of 2019
compared to the same period in 2018. The earnings decrease was primarily related to a $53 thousand increase in salaries and
employee benefits and a $44 thousand increase in professional fees. Additionally, the fourth quarter income tax benefit increased
$61 thousand in 2019.
Future Outlook
The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel,
technology, and processes to meet the growing compliance requirements in the industry. The Company believes it is well
positioned in some of the finest markets in the State of West Virginia and the Commonwealth of Virginia and will continue to
focus on the following: margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key
challenge for the Company in the future is to attract core deposits to fund growth in the new markets through continued delivery
of outstanding customer service coupled with the highest quality products and technology. The Company is expanding the
treasury services function to support the banking needs of financial and emerging technology companies, which will further
enhance core deposits.
57
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,
2019. The model assumes changes in interest rates without any management intervention to change the composition of the
balance sheet. According to the model run for the period ended December 31, 2019, over a twelve-month period, an immediate
100-basis point increase in interest rates would result in an increase in net interest income by 0.3%. An immediate 200-basis point
increase in interest rates would result in an increase in net interest income by 1.3%. A 100-basis point decrease in interest rates
would result in a decrease in net interest income of 6.9%. While management carefully monitors the exposure to changes in
interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of
interest rate changes on net interest income.
The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest
rates. The Company manages its exposure to fluctuations in interest rates through policies established by its ALCO. The ALCO
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.
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except per share data)
December 31, 2019 and 2018
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
Assets of branches held for sale (See Footnote 1)
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest bearing
Interest bearing
Total deposits
Deposits of branches held for sale (See Footnote 1)
Accrued interest payable and other liabilities
Repurchase agreements
FHLB and other borrowings
Subordinated debt
Total liabilities
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1,000; 20,000 authorized; 733 issued in 2019 and 783 issued in 2018 (See
Footnote 12)
Common stock, par value $1; 20,000,000 shares authorized; 11,995,366 shares issued and 11,944,289
shares outstanding in 2019 and 11,658,370 shares issued and 11,607,293 shares outstanding in 2018
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
See Notes to Consolidated Financial Statements
59
2019
2018
$
18,430 $
9,572
28,002
12,549
14,747
7,474
22,221
14,778
235,821
18,514
109,788
1,374,541
(11,775)
1,362,766
21,974
35,374
53,142
46,554
19,630
221,614
9,599
75,807
1,304,366
(10,939)
1,293,427
26,545
34,291
34,207
—
18,480
$ 1,944,114 $ 1,750,969
$
278,547 $
986,495
1,265,042
213,597
1,095,557
1,309,154
188,270
41,685
10,172
222,885
4,124
1,732,178
—
17,706
14,925
214,887
17,524
1,574,196
7,334
7,834
11,995
122,516
72,496
(1,321)
(1,084)
211,936
11,658
116,897
48,274
(6,806)
(1,084)
176,773
$ 1,944,114 $ 1,750,969
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share data)
Years ended December 31, 2019, 2018 and 2017
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
(Loss) gain on sale of available-for-sale securities, net
(Loss) on sale of equity securities, net
Gain (loss) on derivatives
Commercial swap fee income
Holding gain on equity securities
Compliance consulting income
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
2019
2018
2017
$
74,854 $
489
3,055
3,963
82,361
62,468 $
403
3,580
3,309
69,760
17,439
48
4,704
770
22,961
59,400
1,789
57,611
1,409
1,197
571
41,045
520
727
(166)
(7)
1,253
1,717
13,767
921
1,650
64,604
56,175
4,816
3,640
4,025
3,041
1,290
4,999
674
1,663
4,151
2,727
87,201
35,014
8,450
26,564
575
148
427
26,991 $
479
26,512 $
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 $
$
$
60
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
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
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
$
$
$
$
$
$
2.22 $
0.04 $
2.26 $
2.16 $
0.04 $
2.20 $
1.04 $
— $
1.04 $
1.00 $
— $
1.00 $
0.69
—
0.69
0.68
—
0.68
11,713,885
12,044,667
11,030,984
12,722,003
10,308,738
10,440,228
See Notes to Consolidated Financial Statements
61
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years ended December 31, 2019, 2018 and 2017
Net Income
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale
Income tax effect
Reclassification adjustment for (gain) loss recognized in income
Income tax effect
Change in defined benefit pension plan
Income tax effect
Carrying value adjustment - investment hedge
Income tax effect
Total other comprehensive income (loss)
Comprehensive income
See Notes to Consolidated Financial Statements
2019
2018
$ 26,991 $ 12,003 $
2017
7,575
8,498
(4,167)
3,387
(2,294)
1,125
(1,355)
166
(44)
(1,196)
323
44
(12)
(327)
88
284
(77)
—
—
(731)
292
(507)
203
—
—
5,485
(3,074)
1,289
$ 32,476 $
8,929 $
8,864
62
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands except per share data)
Years ended December 31, 2019, 2018 and 2017
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Balance January 1, 2017
$ 16,334 $ 10,048 $
93,412 $ 31,192 $
(4,277) $
Treasury
Stock
(1,084) $
Total
Stockholders’
Equity
145,625
Net Income
Other comprehensive income
Cash dividends paid ($0.10 per
share)
Dividends on preferred stock
Redemption of preferred stock
Common stock issuance, net of
issuance costs
Stock based compensation
Common stock options exercised
—
—
—
—
(8,500)
—
—
—
—
—
—
—
—
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
Net Income
Other comprehensive income
Cash dividends paid ($0.195 per
share)
Dividends on preferred stock
Stock based compensation
Common stock options exercised
Restricted stock units vested
Common stock issued from
subordinated debt conversion, net of
costs
Common stock issued related to
Chartwell acquisition
Preferred stock redemption
—
—
—
—
—
—
—
—
—
(500)
—
—
—
—
—
210
10
62
55
—
—
—
—
—
1,759
1,954
(10)
938
978
—
26,991
—
(2,290)
(479)
—
—
—
—
—
—
—
5,485
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,991
5,485
(2,290)
(479)
1,759
2,164
—
1,000
1,033
(500)
Balance December 31, 2019
$
7,334 $ 11,995 $ 122,516 $ 72,496 $
(1,321) $
(1,084) $
211,936
See Notes to Consolidated Financial Statements
63
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2019, 2018 and 2017
OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to net cash (used in) 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 available-for-sale securities
Loss on sale of available-for-sale securities
Loss on sale of equity securities
Holding gain on equity securities
Gain on sale of portfolio loans
Income on bank owned life insurance, including death benefit proceeds in excess of cash surrender value
Deferred taxes
Amortization of operating lease right-of-use asset
Other, net
Net cash (used in) provided by operating activities
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale
Maturities/paydowns of investment securities available-for-sale
Sales of investment securities available-for-sale
Purchases of premises and equipment, including premises and equipment included in assets of branches
held for sale
Disposals of premises and equipment
Net increase in loans and loans included in assets of branches held for sale
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
Purchase of bank owned life insurance
Proceeds from death benefit of bank owned life insurance policies
Purchase of equity securities
Sales of equity securities
Net cash used in business combination
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in deposits and deposits in branches held for sale
Net decrease in repurchase agreements
Net change in short-term FHLB borrowings
Principal payments on FHLB borrowings
Proceeds from new FHLB borrowings
Subordinated debt redemption
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 in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Business combination non-cash disclosures:
64
2019
2018
2017
26,991 $
1,258
(448)
1,789
3,260
1,759
(1,604,825)
1,611,889
(41,045)
(105)
271
7
(13,767)
(520)
(1,197)
(3,953)
10
10,564
(8,062)
(70,984)
33,583
31,220
(2,042)
—
(113,076)
(49,600)
45,853
2,229
—
731
(574)
688
(1,400)
5,968
(2,651)
(120,055)
144,158
(4,753)
(63,532)
(1,670)
73,200
(12,400)
—
—
(500)
2,164
(2,290)
(479)
133,898
5,781
22,221
28,002 $
12,003 $
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 $
7,575
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
$
$
Assets acquired in business combinations (net of cash received)
Liabilities assumed in business combination
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
Initial recognition of operating lease right-of-use assets
Initial recognition of operating lease liabilities
Cash payments for:
Interest on deposits, repurchase agreements and borrowings
Income taxes
$
$
$
3,389 $
855
$
—
—
115 $
57
10
1,000
12,935
15,659
1,369 $
161
1
15,965
—
—
—
—
1,164
4
—
—
—
—
22,970 $
3,962
17,277 $
191
12,399
6,026
See Notes to Consolidated Financial Statements
65
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” or the “Bank”). MVB Bank’s operating subsidiaries include
Potomac Mortgage Group (“PMG” which began doing business under the registered trade name “MVB Mortgage”), MVB
Insurance, LLC (“MVB Insurance”), MVB Community Development Corporation (“MVB CDC”), and ProCo Global, Inc.
(“ProCo” which began doing business under the registered trade name Chartwell Compliance “Chartwell”).
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. MVB
Insurance continues to operate its title insurance business, which is immaterial in terms of revenue. The Company reorganized
MVB Insurance as a subsidiary of the Bank in 2016.
MVB CDC was formed in 2017 and was created as a means to provide opportunities for loans and investments that help to
increase access to equity capital in under-served urban and rural areas of West Virginia and our market areas in Virginia. MVB
CDC promotes specific bank-driven economic development strategies, provides for effective support for its CRA compliance
strategy, and helps to support positive local reputation of the Bank through marketing and visible activities in the communities
where we live and work.
Chartwell Compliance, based from Bethesda, Maryland, was acquired by MVB on September 13, 2019. Chartwell Compliance
provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services
that include consulting, outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and
banks, in coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert
compliance resources to aid MVB in carrying out stringent and faster new client due diligence.
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, MVB Insurance, MVB CDC, and Chartwell. 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,
66
as discussed below and in Note 21, “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.
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:
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 Company has chosen to measure the equity securities without readily determinable fair
values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for underlying
transactions for identical or similar investments of new issues.
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. If 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
67
by the borrower or subsequent discovery that underwriting standards were not met. The reserve amount was $200 thousand as of
December 31, 2019 and 2018.
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 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.
A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to
68
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and shortages generally
are not classified as impaired. Generally, the Company considers impaired loans to include loans classified as non-accrual loans,
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.
Assets and Liabilities of Branches Held for Sale
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations.
Assets to be acquired and liabilities to be assumed are summarized as follows:
(Dollars in thousands)
Loans
Premises and equipment, net
Assets of branches held for sale
Noninterest-bearing deposits
Interest-bearing deposits
Deposits of branches held for sale
Derivative Instruments
Interest Rate Lock Commitments and Hedges
As of December 31, 2019
42,916
3,638
46,554
19,251
169,019
188,270
$
$
$
$
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
69
lock commitments will close. Fair value changes are recorded in noninterest income in the Company’s consolidated statement of
income. At December 31, 2019 and 2018, the balance of interest rate lock commitments was $1.7 million and $1.8 million,
respectively. There were no forward sales commitments as of December 31, 2019 and 2018.
Interest Rate Cap
The Company 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, 2019 and 2018, the fair value of the interest rate cap was $0 and $8 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, 2019 and 2018, the fair value of interest rate swap
agreements was $5.7 million and $1.4 million, respectively.
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 certain designated fixed-rate loans and available for sale securities. 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 January 2019 with a notional amount of $30.0 million and $45.0 million at December 31, 2019 and 2018,
respectively, which was designated as a fair value hedge associated with the Company’s fixed-rate loan program and certain
available for sale securities. At December 31, 2019 and 2018, the fair value of interest rate swap hedge was $352 thousand and
$343 thousand, respectively.
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, 2019 or 2018.
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, 2019 and 2018, the MSR’s value was $348 thousand and $173 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
70
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, 2019. 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, 2019 and 2018. As of
December 31, 2019 and 2018, the Company had goodwill of $19.6 million and $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 $457 thousand and $550 thousand as of December 31,
2019 and 2018, respectively. Intangibles also include the intangibles resulting from the Chartwell acquisition and are related to
their customer relationships, backlog, a trademark, and a non-competition agreement. These items are amortized over 5 years, 5.3
years, 15 years, and 4 years, respectively. Intangibles resulting from the Chartwell acquisition are included in accrued interest
receivable and other assets on the consolidated balance sheet and totaled $3.0 million and $0 as of December 31, 2019 and 2018,
respectively.
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, 2019 and 2018, the Bank holds
$15.0 million and $11.3 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 2019 and 2018.
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. Subsequent
declines in fair value and gains or losses on sale are recorded in other noninterest expense. At December 31, 2019 and 2018, the
Company held other real estate of $1.4 million and $2.1 million.
71
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 bases 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.
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.
72
(Dollars in thousands except shares and per share data)
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
For the years ended
December 31,
2018
2017
2019
$
$
$
$
26,564 $
479
26,085
427
26,512 $
12,003 $
489
11,514
—
11,514 $
26,085 $
—
—
26,085 $
11,514 $
489
753
12,756 $
7,575
498
7,077
—
7,077
7,077
—
—
7,077
11,713,885
—
—
330,782
12,044,667
11,030,984
489,625
837,500
363,894
12,722,003
10,308,738
—
—
131,490
10,440,228
$
$
$
$
$
$
2.22 $
0.04 $
2.26 $
2.16 $
0.04 $
2.20 $
1.04 $
— $
1.04 $
1.00 $
— $
1.00 $
0.69
—
0.69
0.68
—
0.68
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. 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.
Marketing Costs
Marketing costs are expensed as incurred. Marketing expense was $1.3 million, $1.1 million and $1.2 million for 2019, 2018 and
2017, 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
73
maturity.
Reclassifications
Certain amounts in the 2018 and 2017 consolidated financial statements have been reclassified to conform to the 2019 financial
statement presentation.
Recent Accounting Pronouncements and Developments
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-14, Compensation – Retirement Benefits
– Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for
Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the
disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans.
Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure
requirements. The ASU removed the following disclosures: 1) the amounts in accumulated other comprehensive income expected
to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets
expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension
Insurance Law; 4) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts
and significant transactions between the employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of
the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy;
however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair
value hierarchy and purchases of Level 3 plan assets and 6) for public entities, the effects of a one-percentage-point change in
assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs
and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: 1) the weighted-
average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation
of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified
the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than
plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan
assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company
is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and
modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications
include additions, modification, and removal of disclosure requirements. The ASU removed the following disclosure
requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for
timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements, and 4) for nonpublic entities, the
changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at
the end of the reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and
losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the
reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or
arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more
reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a
nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of
Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose
the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee
has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty
disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective
for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The
Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update requires a reclassification
from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly
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
74
the ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The
Company elected to early adopt ASU 2018-02 during the first quarter of 2018 and elected to reclassify the income tax effects of
the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is the difference between the historical
corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which amounted to $646 thousand.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the
existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce
complexity in fair value hedges of interest-rate risk. The ASU eliminates the requirement to separately measure and report hedge
ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same
income statement line as the hedged item. The ASU also changes certain documentation and assessment requirements and
modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for public
business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this
ASU in accordance with paragraph ASC 815-20-65-3 subpart C. The adoption of this ASU did not have a significant impact on
the Company’s financial condition, results of operations and consolidated financial statements. The Company can now employ
additional hedging strategies as described above, including the ability to apply fair value hedge accounting to a specified pool of
assets by excluding the portion of the hedged items related to prepayments, defaults and other events. This allows the Company to
better align its accounting and the financial reporting of its hedging activities with their economic objectives thereby reducing the
earnings volatility resulting from these hedging activities.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on
certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain
purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt
securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is,
at a premium). For public companies, this update is effective for fiscal years beginning after December 15, 2018, including all
interim periods within those fiscal years. The adoption of this guidance was not material to the consolidated financial statements,
as was always our current policy to amortize premiums of investment securities to the earliest call date.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. Topic 350, Intangibles – Goodwill and Other (Topic 350), currently requires an entity that has not elected
the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment.
In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying
amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill
with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the
carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the
amount of goodwill allocated to that reporting unit to address concerns over the cost and complexity of the two-step goodwill
impairment test. The amendments in this update remove the second step of the test. An entity will apply a one-step quantitative
test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to
exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative
assessment of goodwill impairment. For public companies, this update is effective for fiscal years beginning after December 15,
2019, including all interim periods within those fiscal years, with early adoption permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance effective January 1,
2019 and 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 and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in
May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, and in November 2019, ASU 2019-10, Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and
ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification
and corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in
current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to
determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be
collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the
acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt
securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value
is below amortized cost. The guidance was initially effective for fiscal years beginning after December 15, 2019 and interim
periods within those fiscal years. The Company has formed an implementation team led by the CFO, that also includes other lines
of business and functions within the Company. The Company has also engaged a third party to assist with a data gap analysis and
75
will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired
software to assist in the development of models that can meet the requirements of the new guidance. While this standard may
potentially have a material impact on the Company’s consolidated financial statements, we are still in the process of completing
our evaluation. In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the
SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December
31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year
2019, the proposed delay would be applicable. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments –
Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay
in the effective date of the standard for smaller reporting companies until January 2023.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance in
September 2017, ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017
EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update), in January 2018, ASU
2018-10, Codification Improvements to Topic 842, Leases, in July 2018, ASU 2018-11, Leases (Topic 842): Targeted
Improvements, in December 2018, ASU 2019-01, Leases (Topic 842): Codification Improvements in March 2019, and in
November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and
Leases (Topic 842): Effective Dates. Among other things, in the amendments in ASU 2016-02, lessees will be required to
recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability,
which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the
new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary,
lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in
this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
ASU 2016-02 initially required transition using a modified retrospective approach for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-
11, Leases (Topic 842) - Targeted Improvements, which, among other things, provides an additional transition method that would
allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In
December 2018, the FASB also issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements, for Lessors which
provides certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon the
adoption of ASU 2016-02, ASU 2018-11, and ASU 2018-20 on January 1, 2019, the Company recognized right-of-use assets and
related lease liabilities totaling $12.9 million and $15.7 million, respectively. The initial balance sheet gross up upon adoption
was primarily related to operating leases of certain real estate properties and financing leases of certain office equipment. The
Company has no material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company
applied certain practical expedients provided under ASU 2016-02 whereby the Company did reassess (i) whether any expired or
existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs
for any existing leases. The Company did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as
defined by related accounting guidance). The Company accounted for lease and non-lease components separately because such
amounts are readily determinable under our lease contracts and because this election resulted in a lower impact on our balance
sheet. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments - Overall: Classification and
Measurement (Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from
this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments (except those
accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair
value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do
not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price
changes in orderly transactions for the identical or a similar investment of the same issuer; 2) simplify the impairment assessment
of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment.
When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; 3)
eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to
be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other
comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-
specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for
financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial
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
76
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company
adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on January 1, 2018 did not have a material
impact on the Company’s Consolidated Financial Statements. In accordance with 4) above, the Company discloses the fair value
of its loan portfolio on a quarterly basis using an exit price notion.
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, 2019 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, 2019 or December 31, 2018.
Amortized cost and fair values of investment securities available-for-sale at December 31, 2019 are summarized as follows:
Amortized cost and fair values of investment securities available-for-sale at December 31, 2018 are summarized as follows:
Amortized
Cost
52,046 $
58,748
108,750
219,544
12,247
231,791 $
Amortized
Cost
79,041 $
52,154
84,747
215,942
10,308
226,250 $
$
$
$
$
Unrealized
Gain
Unrealized
Loss
199 $
188
4,399
4,786
181
4,967 $
Fair Value
51,996
58,312
113,092
223,400
12,421
235,821
(249) $
(624)
(57)
(930)
(7)
(937) $
Unrealized
Gain
Unrealized
Loss
(1,625) $
(2,039)
(1,192)
(4,856)
(68)
(4,924) $
Fair Value
77,430
50,115
83,761
211,306
10,308
221,614
14 $
—
206
220
68
288 $
(Dollars in thousands)
U. S. Agency securities
U.S. Sponsored Mortgage-backed securities
Municipal securities
Total debt securities
Other securities
Total investment securities available-for-sale
(Dollars in thousands)
U. S. Agency securities
U.S. Sponsored Mortgage-backed securities
Municipal securities
Total debt securities
Equity and other securities
Total investment securities available-for-sale
77
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, 2019
Available for sale
Amortized Cost
Fair Value
$
$
90 $
15,943
34,460
169,050
219,544 $
91
16,086
35,547
171,677
223,400
Investment securities with a carrying value of $68.0 million and $50.4 million at December 31, 2019 and 2018, 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, 2019, the
details of which are included in the following table. Although these securities, if sold at December 31, 2019 would result in a
pretax loss of $937 thousand, the Company has no intent to sell the applicable securities at such fair values, and maintains the
Company has the ability to hold these securities until all principal has been recovered. 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, 2019, the Company considers all securities with unrealized loss positions to be temporarily impaired, and
consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline
in fair value.
The following table discloses investments in an unrealized loss position at December 31, 2019:
Less than 12 months
(Dollars in thousands)
12 months or more
Description and number of positions
U.S. Agency securities (26)
U.S. Sponsored Mortgage-backed securities (40)
Municipal securities (13)
Other securities (2)
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$
$
8,160 $
16,660
6,018
1,093
31,931 $
(59) $
(170)
(40)
(7)
(276) $
15,399 $
27,498
828
—
43,725 $
(190)
(454)
(17)
—
(661)
The following table discloses investments in an unrealized loss position at December 31, 2018:
Less than 12 months
(Dollars in thousands)
12 months or more
Description and number of positions
U.S. Agency securities (54)
U.S. Sponsored Mortgage-backed securities (42)
Municipal securities (78)
Other securities (2)
Fair Value
Unrealized
Loss
Fair Value
$
$
9,762 $
2,360
5,936
2,452
20,510 $
(123) $
(32)
(46)
(48)
(249) $
63,740 $
47,755
35,955
1,018
148,468 $
Unrealized
Loss
(1,502)
(2,007)
(1,146)
(20)
(4,675)
The Company sold investments available-for-sale of $31.2 million, $2.7 million and $53.2 million in 2019, 2018 and 2017,
respectively. These sales resulted in gross gains of $105 thousand, $352 thousand and $1.1 million and gross losses of $271
thousand, $25 thousand, and $372 thousand in 2019, 2018 and 2017, respectively.
The Company sold equity investments of $6.0 million, $0, and $0 in 2019, 2018 and 2017, respectively. These sales resulted in
gross gains of $0, $0, and $0 and gross losses of $7 thousand, $0, and $0, in 2019, 2018 and 2017, respectively.
78
The Company recognized unrealized holding gains on equity securities of $13.8 million, $0, and $0, respectively, in 2019, 2018
and 2017. The Company recognized holding losses on equity securities of $0, $590 thousand, and $0, respectively, in 2019, 2018
and 2017. These were recorded in noninterest income in the consolidated statements of income. A majority of the 2019 unrealized
holding gains on equity securities was the result of the Company recognizing a $13.5 million pre-tax gain after a valuation on its
Fintech investment portfolio in the second quarter of 2019.
The Company sold no held-to-maturity investments during the years of 2019, 2018, or 2017.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company routinely generates 1-4 family mortgages for sale into the secondary market. During 2019, 2018 and 2017, the
Company recognized sales proceeds of $1.6 billion, $1.2 billion and $1.4 billion, resulting in mortgage fee income of $41.0
million, $32.3 million and $37.1 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 costs and (fees), net
Loans receivable
$
$
2019
1,063,828 $
271,604
35,106
3,697
1,374,235
306
1,374,541 $
2018
941,033
294,929
59,015
9,605
1,304,582
(216)
1,304,366
The following table summarizes the primary segments of the loan portfolio as of December 31, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
December 31, 2018
Individually evaluated for impairment
Collectively evaluated for impairment
Total Loans
Commercial Residential
Home
Equity
Consumer
Total
$
7,401 $
1,953 $
95 $
1,056,427
269,651
$ 1,063,828 $ 271,604 $ 35,106 $
35,011
$
9,734 $
2,831 $
123 $
931,299
292,098
$ 941,033 $ 294,929 $ 59,015 $
58,892
34 $
9,483
3,663
1,364,752
3,697 $ 1,374,235
90 $
12,778
9,515
1,291,804
9,605 $ 1,304,582
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. As of December 31, 2019, the balance of
loans classified as held for sale as a result of this agreement was $42.9 million.
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
79
basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a
specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those
for which a specific allowance was not necessary as of December 31, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Impaired Loans
December 31, 2018
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Impaired Loans
Impaired Loans with
Specific Allowance
Impaired
Loans with
No Specific
Allowance
Recorded
Investment
Related
Allowance
Recorded
Investment
Total Impaired Loans
Unpaid
Principal
Balance
Recorded
Investment
$
$
$
$
2,606 $
1,786
—
4,392
—
—
—
4,392 $
249 $
325
—
574
—
—
—
574 $
644 $
295
2,070
3,009
1,953
95
34
5,091 $
3,250 $
2,081
2,070
7,401
1,953
95
34
9,483 $
4,308
2,171
3,467
9,946
2,045
100
35
12,126
4,885 $
1,842
—
6,727
—
—
—
6,727 $
668 $
375
—
1,043
—
—
—
1,043 $
387 $
396
2,224
3,007
2,831
123
90
6,051 $
5,272 $
2,238
2,224
9,734
2,831
123
90
12,778 $
5,292
2,300
3,601
11,193
2,882
123
316
14,514
Impaired loans have decreased by $3.3 million, or 25.8%, during 2019 This change is the net effect of multiple factors, including
principal curtailments of $1.6 million, the reclassification of $1.4 million of previously reported impaired loans to performing
loans, partial charge-offs of $999 thousand, the identification of $223 thousand of recently impaired loans, foreclosure and
reclassification to other real estate owned of $135 thousand, and normal loan amortization of $474 thousand.
The $1.6 million of principal curtailments were concentrated in one commercial relationship in which the underlying assets were
purchased by an unrelated borrower and repurposed in a new business operation, with stronger performance, allowing the new
loan to be originated as a performing loan. This relationship represented $1.4 million, or 88% of the total principal curtailments.
The $1.4 million included in the reclassification of previously reported impaired loans to performing loans was concentrated in
one residential real estate loan that returned to accrual status after the borrower provided six consecutive, on-time payments, thus
allowing the loan to be adjusted to accrual status, and allowing the loan to be considered a performing loan.
80
The following table presents the average recorded investment in impaired loans and related interest income recognized for the
years ended:
December 31, 2019
December 31, 2018
December 31, 2017
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
$
3,202 $
— $
— $
4,052 $
51 $
106 $
3,718 $
155 $
3,220
162
140
6,416
159
94
3,199
100
2,151
8,573
2,719
154
45
$ 11,491 $
123
285
16
2
—
303 $
131
271
16
2
—
289 $
1,367
11,835
2,569
100
149
14,653 $
106
316
20
2
—
338 $
8
208
14
1
—
223 $ 12,495 $
3,429
10,346
1,424
538
187
9
264
13
1
—
278 $
113
98
13
224
53
1
—
278
(Dollars in
thousands)
Commercial
Commercial
Business
Commercial Real
Estate
Acquisition &
Development
Total
Commercial
Residential
Home Equity
Consumer
Total
As of December 31, 2019, the Bank held eleven foreclosed residential real estate properties representing $571 thousand, or
40.9%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two
commercial loan relationships, one of which included two properties for a total of $294 thousand, while the other included seven
properties for a total of $163 thousand. The three remaining properties, totaling $115 thousand, were the result of the foreclosure
of two unrelated borrowers. There are seven additional consumer mortgage loans collateralized by residential real estate property
in the process of foreclosure. The total recorded investment in these loans was $586 thousand as of December 31, 2019. 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.
81
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, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
December 31, 2018
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
Pass
Special
Mention
Substandard
Doubtful
Total
$
511,590 $
406,712
106,428
1,024,730
267,367
34,641
3,613
$ 1,330,351 $
$
432,589 $
371,309
118,754
922,652
290,602
58,100
9,359
$ 1,280,713 $
17,398 $
3,564
1,869
22,831
1,946
383
56
25,216 $
11,894 $
1,494
2,879
16,267
2,177
82
28
18,554 $
540,882
— $
411,770
—
111,176
—
1,063,828
—
271,604
114
35,106
—
—
3,697
114 $ 1,374,235
5,290 $
2,071
179
7,540
2,608
876
164
11,188 $
5,652 $
2,181
2,879
10,712
1,600
39
19
12,370 $
443,531
— $
375,561
—
121,941
129
941,033
129
294,929
119
59,015
—
63
9,605
311 $ 1,304,582
Loans classified as Special Mention totaled $25.2 million and $11.2 million as of December 31, 2019 and December 31, 2018,
respectively. The increase of $14.0 million, or 125.4%, was concentrated in the commercial loan portfolio. This increase is
primarily the result of the risk grade downgrade of six loans to unrelated borrowers, totaling $19.7 million, offset by the payoff of
two existing loans totaling $3.3 million, and normal loan amortization of the loans in the classification. Of the five loans recently
classified as Special Mention, the largest balance of $8.3 million, or 59.3% of the increase, is a note secured by subordinate bonds
related to a sales-tax increment financing district, which have not been refinanced as timely as anticipated due to delays in the
reissuance of senior position bonds. Ongoing development of the district is expected to allow for the refinance of the subordinate
bonds in 2020. A second loan, in the amount of $3.4 million, is secured by a senior care facility which has continued to
supplement operating results with its liquid assets. Recent changes to its revenue strategy are expected to result in improved
performance. A third loan, in the amount of $2.9 million, is secured by a multifamily rental property that has not performed as
intended due to a lack of demand from a nearby university. The property is being remarketed to area professionals and is expected
to report improved performance. The fourth loan is a $1.9 million note secured by residential lots adjacent to a hotel resort
property. The loan is amortizing and has paid as agreed, however, the risk grade was adjusted due to potential legal issues
associated with the primary guarantor. The fifth loan is a $1.8 million government lease transaction that has reported potential
payment issues, and the last of the six loans is a $1.6 million commercial real estate loan to a non-profit that has reported less than
expected cash flow performance. These matters are being monitored and any significant developments will result in reevaluation
of the risk grades.
Loans classified as Substandard totaled $18.6 million and $12.4 million as of December 31, 2019 and December 31, 2018,
respectively. The increase of $6.2 million, or 50%, was concentrated in the commercial loan portfolio. The increase is primarily
the result of the risk grade downgrade of four loans to two unrelated borrowers, totaling $8.1 million, offset by the partial charge
off of a loan totaling $989 thousand, the risk grade upgrade of a $1.0 million loan, and the payoff of two existing loans totaling
$1.4 million. Of the four loans recently classified as Substandard, three loans totaling $6.1 million were each provided to a single
borrower to finance the acquisition of equipment to be used in the coal industry. Repayment performance has been unsatisfactory
and there are no significant expectations of improvement within the industry. The fourth loan, in the amount of $2.0 million, is
secured by a senior care facility that has struggled to collect its receivables and government reimbursements in a timely manner,
which has placed considerable strain on operating performance, which are not expected to be corrected in the short term. These
matters are being monitored and any significant developments will result in reevaluation of the risk grades.
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as
determined by the length of time a recorded payment is past due.
82
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.
The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual
loans as of December 31, 2019 and 2018:
(Dollars in thousands)
December 31, 2019
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
December 31, 2018
Commercial
Commercial Business
Commercial Real Estate
Acquisition & Development
Total Commercial
Residential
Home Equity
Consumer
Total Loans
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
$ 537,602 $
411,070
110,717
1,059,389
267,515
34,382
3,610
$ 1,364,896 $
3,189 $
522
180
3,891
3,003
545
1
7,440 $
47 $
178
—
225
549
84
58
916 $
44 $
—
279
323
537
95
28
983 $
3,280 $ 540,882 $
411,770
700
111,176
459
4,439 1,063,828
271,604
4,089
35,106
724
3,697
87
9,339 $ 1,374,235 $
2,848 $
295
390
3,533
1,461
95
34
5,123 $
$ 432,097 $
374,880
121,644
928,621
291,665
58,575
9,485
$ 1,288,346 $
6,380 $
681
—
7,061
1,000
400
28
8,489 $
1,746 $
—
—
1,746
760
40
10
2,556 $
—
297
3,605
1,504
—
82
3,308 $ 11,434 $ 443,531 $
681
297
12,412
3,264
440
120
5,191 $ 16,236 $ 1,304,582 $
375,561
121,941
941,033
294,929
59,015
9,605
3,684 $
385
426
4,495
2,442
84
82
7,103 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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 $582 thousand, $771 thousand, and $423 thousand for 2019,
2018 and 2017, 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 $139 thousand and $204 thousand as
of December 31, 2019 and 2018, respectively.
83
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.
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 $332 thousand and $284 thousand as of December 31, 2019 and 2018,
respectively.
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, 2019, 2018,
and 2017. Activity in the allowance is presented for the periods indicated:
(Dollars in thousands)
ALL balance at December 31, 2018
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2019
Individually evaluated for impairment
Collectively evaluated for impairment
Commercial Residential Home Equity Consumer
$
8,605 $
(998)
1
2,490
10,098 $
574 $
9,524 $
1,405 $
—
1
(134)
1,272 $
— $
1,272 $
684 $
—
4
(361)
327 $
— $
327 $
$
$
$
245 $
(10)
49
(206)
78 $
— $
78 $
Total
10,939
(1,008)
55
1,789
11,775
574
11,201
84
(Dollars in thousands)
ALL balance at December 31, 2017
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2018
Individually evaluated for impairment
Collectively evaluated for impairment
(Dollars in thousands)
ALL balance at December 31, 2016
Charge-offs
Recoveries
Provision
ALL balance at December 31, 2017
Individually evaluated for impairment
Collectively evaluated for impairment
Commercial Residential Home Equity Consumer
$
7,804 $
(1,024)
15
1,810
8,605 $
1,043 $
7,562 $
1,119 $
(166)
22
430
1,405 $
— $
1,405 $
$
$
$
705 $
—
59
(80)
684 $
— $
684 $
250 $
(290)
5
280
245 $
— $
245 $
Commercial Residential Home Equity Consumer
990 $
$
(141)
40
230
1,119 $
— $
1,119 $
7,181 $
(1,138)
39
1,722
7,804 $
1,172 $
6,632 $
728 $
(109)
4
82
705 $
— $
705 $
202 $
(109)
18
139
250 $
16 $
234 $
$
$
$
Total
9,878
(1,480)
101
2,440
10,939
1,043
9,896
Total
9,101
(1,497)
101
2,173
9,878
1,188
8,690
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, 2019 and 2018, the Bank had specific reserve allocations for TDR’s of $527 thousand and $1.0 million,
respectively.
Loans considered to be troubled debt restructured loans totaled $7.7 million and $8.0 million as of December 31, 2019 and
December 31, 2018, respectively. Of these totals, $4.4 million and $4.2 million, respectively, represent accruing troubled debt
restructured loans and represent 46% and 33%, respectively, of total impaired loans. Meanwhile, as of December 31, 2019,
$3.0 million represent four loans to two borrowers that have defaulted under the restructured terms. The largest of these loans, at
$2.3 million, is a restructured commercial loan to a company previously dependent on the coal industry, which is now structured
as an unsecured loan. The other three of these loans, totaling $679 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, 2019. These two development loans were also considered non-performing loans as of
December 31, 2018.
During the year ended December 31, 2019, no restructured loan defaulted under their modified terms that were not already
classified as non-performing for having previously defaulted under their modified terms.
There were no commitments to advance funds to any TDRs as of December 31, 2019.
85
The following table presents details related to loans identified as Troubled Debt Restructurings during the years ended
December 31, 2019 and 2018.
New TDR’s 1
December 31, 2019
December 31, 2018
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Number of
Contracts
(Dollars in thousands)
Commercial
210
Commercial Business
11
Commercial Real Estate
1,798
Acquisition & Development
2,019
Total Commercial
—
Residential
39
Home Equity
8
Consumer
2,066
Total
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after
modification of the loan.
272 $
11
1,798
2,081
—
39
10
2,130 $
336 $
—
—
336
246
—
—
582 $
2 $
—
—
2
3
—
—
5 $
2 $
1
1
4
—
1
1
6 $
333
—
—
333
323
—
—
656
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
2019
2018
3,257 $
14,574
16,869
1,019
2,207
37,926
(15,952)
21,974 $
3,934
17,235
14,293
2,642
1,670
39,774
(13,229)
26,545
$
$
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. As of December 31, 2019, the balance of
premises and equipment held for sale as a result of this agreement was $3.6 million.
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 $3.0 million, $2.8 million and $2.6 million for 2019, 2018 and 2017, respectively.
The Company leases certain premises, for the operation of some banking offices, and equipment under operating and finance
leases. At December 31, 2019, the Company had lease liabilities totaling $14.8 million and right-of-use assets totaling $13.5
million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets,
respectively. For the year ended December 31, 2019, the weighted average remaining lease term for finance leases was 2.7 years
and the weighted average discount rate used in the measurement of finance lease liabilities was 2.80%. For the year ended
December 31, 2019, the weighted average remaining lease term for operating leases was 11.8 years and the weighted average
discount rate used in the measurement of operating lease liabilities was 3.54%.
86
Lease costs were as follows:
(Dollars in thousands)
Amortization of right-of-use assets, finance leases
Interest on lease liabilities, finance leases
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
$
$
December 31, 2019
77
6
2,120
72
38
2,313
Rent expense for the year ended December 31, 2018 and 2017, prior to the adoption of ASU 2016-02, was $2.0 million and $2.0
million, respectively.
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the year ended
December 31, 2019. At December 31, 2019, the Company had leases that had not commenced that will create approximately $2.4
million and $4.1 million of additional lease liabilities and right-of-use assets, respectively for the Company.
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as
follows:
(Dollars in thousands)
2020
2021
2022
2023
2024
2025 and thereafter
Total future minimum lease payments
Less: Amounts representing interest
Present value of net future minimum lease payments
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
December 31, 2019
Finance Leases
Operating Leases
77
77
51
—
—
—
205
(7)
198
$
$
$
1,891
1,792
1,730
1,452
1,371
10,000
18,236
(3,642)
14,594
$
$
$
2019
2018
$
$
$
278,547 $
351,435
363,026
272,034
1,265,042 $
213,597
376,398
317,697
401,462
1,309,154
8,955 $
15,280
Maturities of time deposits at December 31, 2019 were as follows (Dollars in thousands):
2020
2021
2022
2023
2024
Total
$
$
223,633
10,495
19,074
11,947
6,885
272,034
87
On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a
subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities
of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the
Purchase Agreement, Summit has agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real
property, personal property, and other fixed assets associated with the branch locations. As of December 31, 2019, the balance of
deposits classified as held for sale as a result of this agreement was $188.3 million.
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, 2019 was approximately $162.4 million. At December 31, 2019 and 2018 the Bank had borrowed $222.9 million
and $214.9 million. As of December 31, 2019, our maximum borrowing capacity with the FHLB was $547.2 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 $192.1 million at December 31, 2019, compared to $212.4 million at year-end 2018.
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
$
2019
192,063 $
187,226
240,811
2.24 %
1.81 %
2018
212,395 $
171,117
264,297
2.27 %
2.62 %
2017
149,596
100,969
220,097
1.16 %
1.61 %
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
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, 2019 and December 31, 2018. These
borrowings were collateralized with investment securities with a carrying value of $10.5 million and $15.4 million at
December 31, 2019 and December 31, 2018, respectively, and were comprised of U.S. Government Agencies and Mortgage
backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.
Repurchase agreements totaled $10.2 million at December 31, 2019, compared to $14.9 million at December 31, 2018.
Information related to repurchase agreements is summarized as follows:
88
(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
$
2019
2018
2017
10,172 $
11,252
14,655
0.43 %
0.44 %
14,925 $
18,536
20,903
0.30 %
0.16 %
22,403
25,160
25,972
0.30 %
0.34 %
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%
Fixed interest rate notes, originating in November 2019, due between November 2022 and November
2024, with interest of between 1.74% and 1.81% payable monthly
2019
2018
$
$
822 $
—
30,000
30,822 $
1,741
751
—
2,492
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
$
2019
2018
2017
4,124 $
12,125
17,524
6.35 %
3.51 %
17,524 $
25,774
33,524
6.81 %
6.57 %
33,524
33,524
33,524
6.69 %
6.70 %
In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its
MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the
Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The proceeds from the sale of the Trust
Preferred Securities will be loaned to the Company under subordinated Debentures (the “Debentures”) issued to the Trust
pursuant to an Indenture. The Debentures are the only asset of the Trust. The Trust Preferred Securities have been issued to a
pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations. The securities issued
by the Trust are includable for regulatory purposes as a component of the Company’s Tier 1 capital.
The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012. Interest
payments are due in March, June, September and December and are adjusted at the interest due dates at a rate of 1.62% over the
three-month LIBOR Rate. The obligations of the Company with respect to the issuance of the trust preferred securities constitute
a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the
extent set forth in the related guarantees.
On June 30, 2014, the Company issued its Convertible Subordinated Promissory Notes Due 2024 (the “Notes”) to various
investors in the aggregate principal amount of $29,400,000. The Notes were issued in $100,000 increments per Note subject to a
minimum investment of $1,000,000. The Notes expired 10 years after the initial issuance date of the Notes (the “Maturity Date”).
Interest on the Notes accrued 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 was 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 was 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 was 7.5% per annum. For investments of $10,000,000 or greater, the interest rate on
the Notes was 7% per annum, regardless of whether the holder owns or acquires MVB common stock. The principal on the Notes
was to be paid in full at the Maturity Date. On the fifth anniversary of the issuance of the Notes, a holder was able to 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 were unsecured and subject to the terms and conditions of any senior debt and after consultation with the Federal
89
Board, the Company was able, 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 were to be made pro rata among the holders of all outstanding Notes.
At the election of a holder, any or all of the Notes were convertible 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 had elected to
waive the timing requirements associated with when a conversion may occur and, instead, the Company would accept notices of
conversion at any time prior to July 1, 2019, which was the final conversion date for the Notes. The Notes converted into common
stock based on $16 per share of the Company’s common stock. The conversion price was 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 was required to 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.
The Notes were 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. On July 10, 2019, the Federal Reserve
Board provided the Company with its approval for the Company to redeem all of the outstanding Notes. On or about August 1,
2019, the Company provided notice to the holders of the outstanding Notes that it would redeem the outstanding Notes on
September 30, 2019.
The Company reflects subordinated debt in the amount of $4.1 million and $17.5 million as of December 31, 2019 and
December 31, 2018 and interest expense of $770 thousand, $1.8 million, and $2.2 million for the years ended December 31, 2019,
2018 and 2017, 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.
In 2019, $1.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 62,500 new
shares, and $12.4 million of subordinated debt was redeemed. These transactions provided an annual interest expense savings of
$970 thousand.
A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
Year
2020
2021
2022
2023
2024
Thereafter
Amount
192,092
32
10,761
10,000
10,000
4,124
227,009
$
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
90
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
2019
385,871 $
18,145
24,821
428,837 $
2018
329,229
22,156
28,852
380,237
$
$
The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers
throughout the Marion, Harrison, Monongalia, Kanawha, Jefferson and Berkeley County areas of West Virginia as well as the
Northern Virginia area and adjacent counties. Collateral for loans is primarily residential and commercial real estate, personal
property, and business equipment. The Company evaluates the credit worthiness of each of its customers on a case-by-case basis,
and the amount of collateral it obtains is based upon management’s credit evaluation.
Regulatory
The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board
requirements. The average balance maintained in accordance with such requirements was $0 on December 31, 2019 and 2018.
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.
91
The provisions for income taxes for the years ended December 31, were as follows:
(Dollars in thousands)
Current:
Federal
State
2019
$
Deferred expense (benefit)
Federal
State
Income tax expense
$
$
$
2018
2017
2,203 $
1,031
3,234 $
117 $
22
139
3,373 $
2,635
771
3,406
1,268
81
1,349
4,755
10,450 $
2,101
12,551 $
(3,716) $
(237)
(3,953)
8,598 $
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:
2019
2018
2017
(Dollars in thousands)
Tax at Federal tax rate
Tax effect of:
State income tax
Tax exempt earnings
Impact of deferred tax rate change
Amount
%
Amount
%
Amount
%
$
7,353
21 % $
3,229
21 % $
4,369
2,101
(856)
—
8,598
$
$
6.0 %
(2.8) %
— % $
24.2 % $
738
(594)
—
3,373
4.8 %
(3.9) %
— % $
21.9 % $
771
(1,031)
646
4,755
34 %
6.0 %
(6.4) %
5.0 %
38.6 %
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 and after are based on the newly enacted U.S. statutory federal income tax rate of 21%.
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
SERP/RSU
Other
Gross deferred tax assets
$
2019
2018
3,310 $
1,589
—
652
10
5,561
(1,505)
(164)
(1,088)
(3,838)
(2,134)
(8,729)
3,084
1,266
1,252
—
1
5,603
(1,143)
(138)
—
—
(1,827)
(3,108)
2,495
$
(3,168) $
Depreciation
Pension
Unrealized gain on securities available-for-sale
Holding gain on equity securities
Goodwill
Gross deferred tax liabilities
Net deferred tax (liability) asset
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
92
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. As such, 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 three 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, $3.0 million in the aggregate between the three
affordable housing investment funds. In addition, MVB has recognized no gains or losses from the three affordable housing
investment funds.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company has granted loans to officers and directors of the Company and to their immediate family members 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, 2019
December 31, 2018
Balance at
Beginning of
Year
27,971 $
$
Borrowings
Executive
Officer and
Director
Retirements Repayments
13,897 $
— $
(29,584) $
Balance at
End of Year
12,284
$
25,199 $
48,269 $
— $
(45,497) $
27,971
The Company held related party deposits of $35.5 million and $25.2 million at December 31, 2019 and December 31, 2018,
respectively.
The Company held no related party repurchase agreements at December 31, 2019 and December 31, 2018.
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 this 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.
93
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 $783 thousand and $377 thousand as of
December 31, 2019 and 2018, respectively. Service cost was $406 thousand and $376 thousand in 2019 and 2018, respectively.
Pension expense was $256 thousand, $286 thousand and $256 thousand in 2019, 2018 and 2017, respectively.
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, 2019 and 2018 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
9,416 $
—
392
99
1,769
—
(241)
11,435 $
10,058
—
352
348
(1,127)
—
(215)
9,416
2018
2019
$
$
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
$
$
$
$
$
5,238 $
808
360
(241)
6,165 $
(5,270) $
5,883
—
613 $
11,435 $
5,166
(429)
716
(215)
5,238
(4,179)
4,687
—
508
9,416
At December 31, 2019, 2018 and 2017, the weighted average assumptions used to determine the benefit obligation are as follows:
2019
2018
2017
Discount rate
Rate of compensation increase
3.24 %
N/A
4.23 %
N/A
3.55 %
N/A
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
2019
2018
2017
— $
392
(407)
—
271
256 $
— $
352
(372)
—
306
286 $
—
360
(345)
—
241
256
$
$
94
For the years December 31, 2019, 2018 and 2017, the weighted average assumptions used to determine net periodic pension cost
are as follows:
2019
2018
2017
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase
3.24 %
6.75 %
N/A
3.55 %
6.75 %
N/A
4.05 %
6.75 %
N/A
The Company’s pension plan asset allocations at December 31, 2019 and 2018 are as follows:
Plan Assets
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Real estate investment trusts
Total
12/31/2019
12/31/2018
4 %
23 %
15 %
33 %
24 %
1 %
100 %
5 %
24 %
17 %
31 %
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 $460 thousand.
The following table sets forth by level, within the fair value hierarchy, as defined in Note 17, “Fair Value Measurements,” the
Pension Plan’s assets at fair value as of December 31, 2019.
(Dollars in thousands)
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
Real estate investment trusts
247 $
1,418
—
2,034
1,480
—
— $
—
925
—
—
61
— $
—
—
—
—
—
247
1,418
925
2,034
1,480
61
Level III
Level II
Level I
Total
$
Total assets at fair value
$
5,179 $
— $
986 $
6,165
The following table sets forth by level, within the fair value hierarchy, as defined in Note 17, “Fair Value Measurements,” the
Pension Plan’s assets at fair value as of December 31, 2018.
(Dollars in thousands)
Assets:
Cash
Fixed income
Alternative investments
Domestic equities
Foreign equities
262 $
1,257
—
1,624
1,205
— $
—
890
—
—
— $
—
—
—
—
262
1,257
890
1,624
1,205
Level III
Level II
Level I
Total
$
Total assets at fair value
$
4,348 $
— $
890 $
5,238
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 this 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.
95
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 January 1, 2019 through December 31, 2019
Estimated future benefit payments reflecting expected future service
2020
2021
2022
2023
2024
2025 through 2028
Cash Flow
360
323
331
386
429
450
2,652
$
$
$
$
$
$
$
NOTE 11. GOODWILL AND OTHER INTANGIBLE ASSETS
The table below summarizes the changes in carrying amounts of goodwill and other intangibles, including core deposit
intangibles, for the periods presented:
(Dollars in thousands)
Balance at January 1, 2019
Goodwill and intangibles resulting from Chartwell acquisition
Amortization expense
Balance at December 31, 2019
Balance at January 1, 2018
Amortization expense
Balance at December 31, 2018
Balance at January 1, 2017
Amortization expense
Balance at December 31, 2017
Intangibles
Accumulated
Depreciation
Goodwill
$ 18,480 $ 1,006 $
Gross
1,150
—
3,220
—
$ 19,630 $ 4,226 $
$ 18,480 $ 1,006 $
—
—
$ 18,480 $ 1,006 $
$ 18,480 $ 1,006 $
—
—
$ 18,480 $ 1,006 $
Net
550
(456) $
3,220
—
(297)
(297)
(753) $ 3,473
(360) $
(96)
(456) $
(262) $
(98)
(360) $
646
(96)
550
744
(98)
646
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of
accounting. Intangibles include the core deposit intangibles from the 2015 branch acquisition and the intangibles resulting from
the Chartwell acquisition. 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 intangibles resulting
from the Chartwell acquisition are related to their customer relationships, backlog, a trademark, and a non-competition agreement.
These items are amortized over 5 years, 5.3 years, 15 years, and 4 years, respectively.
The table below presents estimated amortization expense for the Company’s other intangible assets (dollars in thousands):
2020
2021
2022
2023
2024
Thereafter
$
$
706
703
699
612
328
425
3,473
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, 2019 and 2018. The Company has
not identified any triggering events since the impairment evaluation that would indicate potential impairment.
96
Intangibles, including 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 June 30, 2014, the Company filed Certificates of Designations for its Convertible Noncumulative Perpetual Preferred Stock,
Series B (“Class B Preferred”) and its Convertible Noncumulative Perpetual Preferred Stock, Series C (“Class C Preferred”). The
Class B Preferred Certificate designated 400 shares of preferred stock as Class B Preferred shares. The Class B Preferred shares
carry an annual dividend rate of 6% and are convertible into shares of Company common stock within thirty days after the first,
second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of $16 per share, as adjusted
for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class B
Preferred Stock regarding the Company’s agreement to waive the timing requirements associated with when a conversion may
occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion
date for the Preferred Stock. The Class B Preferred shares are redeemable by the Company on or after the fifth anniversary of the
original issue date for the liquidation amount of $10,000, 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 the liquidation amount of $10,000, as defined therein, plus declared and unpaid
dividends. Redemption is subject to any necessary regulatory approvals. In the event of liquidation of the Company, shares of
Class C Preferred stock shall be junior to creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred
Stock, Series A and the Class B Preferred shares. Holders of Class C Preferred shares shall have no voting rights, except for
authorization of senior shares of stock, amendment to the Class C Preferred shares, share exchanges, reclassifications or changes
of control, or as required by law. The proceeds of these preferred stock offerings will be used to support continued growth of the
Company and its subsidiaries.
97
On August 27, 2019, the Company redeemed preferred stock in the amount of $500 thousand.
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,
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, 2019, the Plan had 3.2 million shares
authorized and 715,517 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 2019, 2018 and 2017 was $1.8 million, $1.3 million and
$813 thousand, respectively. Proceeds from stock options exercised were $2.2 million, $2.1 million and $(10) thousand during
2019, 2018 and 2017, respectively. During 2019, 2018 and 2017, 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.
The following summarizes MVB’s stock options as of and for the year ended December 31, 2019, and the changes for the year
then ended:
2019
2018
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired
Outstanding at end of year
Exercisable at end of year
Number of
Shares
1,763,491 $
46,250
(210,050)
(6,450)
Weighted
Average
Exercise Price
14.36
17.03
10.30
17.15
Number of
Shares
1,681,645 $
256,344
(161,298)
(13,200)
Weighted
Average
Exercise Price
13.46
19.50
13.54
14.97
1,593,241 $
14.96
1,763,491 $
14.36
1,049,516 $
14.41
994,598 $
13.21
Weighted-average fair value of options granted during 2019
Weighted-average fair value of options granted during 2018
Weighted-average fair value of options granted during 2017
$
$
$
4.22
5.97
4.05
The intrinsic value of options exercised during 2019, 2018 and 2017 was $1.9 million, $871 thousand and $8 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 2.02%, 2.81% and 2.29% for 2019, 2018 and 2017, 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 2019 options was 21.80%, while for
the 2018 options it was 18.64% and 2017 options it was 22.76%. The expected dividend yield used was 0.84% for 2019, 0.54%
for 2018 and 0.60% for 2017.
The following summarizes information related to the total outstanding and exercisable stock options at December 31, 2019:
Options Outstanding
Options Exercisable
Total Options
1,593,241
Weighted-
Average
Exercise Price Intrinsic Value
15,586,952
$14.96
Weighted-
Average
Remaining Life
5.90
Total Options
1,049,516
98
Weighted-
Average
Exercise Price Intrinsic Value
10,838,239
$14.41
Weighted-
Average
Remaining Life
5.06
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 RSU’s until the recipient
becomes the record holder of those shares.
The Company granted 122,009 RSU’s in 2019, 95,250 time-based and 26,759 performance based. In 2018, the Company granted
62,735 RSU’s, 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. Time-based RSU’s granted in 2019 vest in five equal installments per year over a five-year
period. Time-based RSU’s granted in 2018 vest solely based on time and continued employment in one installment at the end of
five years.
A summary of the activity for the Company’s RSU’s for the period indicated is presented in the following table:
Balance at beginning of year
Granted
Vested
Forfeited
Balance at end of year
2019
2018
Shares
Weighted Average Grant
Date Fair Value
Shares
Weighted Average Grant
Date Fair Value
60,345 $
122,009
(9,576)
(12,020)
160,758 $
19.31
15.50
18.27
16.72
16.67
— $
62,735
(1,368)
(1,022)
60,345 $
—
19.29
18.27
19.55
19.31
At December 31, 2019, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense
related to unvested RSU awards was $1.8 million. Based upon the contractual terms, this expense is expected to be recognized as
follows:
(Dollars in thousands)
2020
2021
2022
2023
2024
Stock-Based Compensation Expense
$
$
778
454
316
173
68
1,789
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 2019, 2018 and 2017 was $1.8 million, $1.3 million and $813
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
$
$
2019
2018
2017
873 $
886
1,759 $
936 $
331
1,267 $
813
—
813
NOTE 14. REGULATORY CAPITAL REQUIREMENTS
99
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. The Bank is
required to comply with applicable capital adequacy standards established by the FDIC. 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.
Quantitative measures established by regulation to ensure capital adequacy require the Bank 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, 2019 and 2018, the Company and the Bank meet all capital adequacy requirements to which they are
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
Amount
Ratio
Amount
Ratio
Amount
Ratio
Minimum for Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
As of December 31, 2019
Total Capital (to risk-weighted assets)
Subsidiary Bank
$ 201,672
Tier 1 Capital (to risk-weighted assets)
Subsidiary Bank
$ 189,365
Common Equity Tier 1 Capital (to risk-weighted assets)
$ 189,365
Subsidiary Bank
12.8%
$ 157,107
10.0%
$ 155,143
9.88%
$ 125,686
8.0%
12.1%
$ 125,686
8.0%
$ 123,722
7.88%
$ 94,264
6.0%
12.1%
$ 102,120
6.5%
$ 100,156
6.38%
$ 70,698
4.5%
Tier 1 Capital (to average assets)
Subsidiary Bank
$ 189,365
9.9%
$ 95,227
5.0%
N/A
N/A
$ 76,182
4.0%
As of December 31, 2018
Total Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 193,495
$ 186,127
Tier 1 Capital (to risk-weighted assets)
Consolidated
Subsidiary Bank
$ 168,672
$ 174,704
Common Equity Tier 1 Capital (to risk-weighted assets)
$ 156,714
Consolidated
$ 174,704
Subsidiary Bank
13.8%
13.3%
N/A
$ 140,065
N/A
10.0%
N/A
$ 138,314
N/A
9.88%
$ 112,299
$ 112,052
12.0%
12.5%
N/A
$ 112,052
N/A
8.0%
N/A
$ 110,301
N/A
7.88%
$ 84,224
$ 84,039
11.2%
12.5%
N/A
$ 91,042
N/A
6.5%
N/A
$ 89,292
N/A
6.38%
$ 63,168
$ 63,029
Tier 1 Capital (to average assets)
Consolidated
Subsidiary Bank
$ 168,672
$ 174,704
9.9%
10.2%
N/A
$ 85,315
N/A
5.0%
N/A
N/A
N/A
N/A
$ 68,375
$ 68,252
8.0%
8.0%
6.0%
6.0%
4.5%
4.5%
4.0%
4.0%
1 The capital conservation buffer requirement was phased in over three years and was fully phased in on January 1, 2019. 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%.
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.
100
NOTE 16. 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.
101
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, 2019
Financial assets:
Cash and cash equivalents
Certificates of deposits with other banks
Securities available-for-sale
Equity securities
Loans held for sale
Loans
Mortgage servicing rights
Interest rate lock commitment
Interest rate swap
Accrued interest receivable
Fair value hedge
Financial liabilities:
Deposits
Repurchase agreements
FHLB and other borrowings
Mortgage-backed security hedges
Fair value hedge
Interest rate swap
Accrued interest payable
Subordinated debt
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
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
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)
28,002 $
—
—
—
—
—
—
—
—
—
—
— $
12,586
198,562
—
109,788
—
—
—
5,722
1,591
1,770
—
—
37,259
18,514
—
1,364,706
348
1,660
—
6,317
—
— $
—
—
—
—
—
—
—
1,249,135 $
10,172
222,891
186
1,418
5,722
1,060
4,124
—
—
—
—
—
—
—
—
22,221 $
—
—
6,027
—
—
—
—
—
—
—
—
— $
14,300
188,492
3,272
75,807
—
—
—
1,375
8
343
1,368
—
—
33,122
300
—
1,276,065
173
1,750
—
—
—
6,342
— $
—
—
—
—
—
—
1,249,164 $
14,925
214,969
853
1,375
1,064
18,250
—
—
—
—
—
—
—
$
$
$
$
28,002 $
12,549
235,821
18,514
109,788
1,362,766
348
1,660
5,722
7,909
1,770
1,265,042 $
10,172
222,885
186
1,418
5,722
1,060
4,124
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
1,064
17,524
28,002 $
12,586
235,821
18,514
109,788
1,364,706
348
1,660
5,722
7,909
1,770
1,249,135 $
10,172
222,891
186
1,418
5,722
1,060
4,124
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
1,064
18,250
102
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 17. 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 — 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, 2019. Valuation techniques are consistent with techniques used
in prior periods. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and
classified as Level III instruments.
•
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Fair value measurement
is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit
rating, prepayment assumptions and other factors such as credit loss assumptions. The valuation methodologies utilized may
include significant unobservable inputs.
•
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.
103
•
Interest rate swap — Interest rate swaps are recorded at fair value based on third party vendors who compile prices from
various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable
market data.
•
Fair value hedge — Treated like an interest rate swap, fair value hedges are recorded at fair value based on third party
vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using
pricing models that consider observable market data.
The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a
recurring basis as of December 31, 2019 and 2018 by level within the fair value hierarchy. Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
December 31, 2019
(Dollars in thousands)
Assets:
U.S. Government Agency securities
U.S. Sponsored Mortgage backed securities
Municipal securities
Other securities
Loans held for sale
Interest rate lock commitment
Interest rate swap
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
Other securities
Equity securities
Loans held for sale
Interest rate lock commitment
Interest rate swap
Interest rate cap
Liabilities:
Interest rate swap
Fair value hedge
Mortgage-backed security hedges
Level I
Level II
Level III
Total
$
$
— $
—
—
—
—
—
—
—
—
—
—
51,996 $
58,312
75,833
12,421
109,788
—
5,722
1,770
5,722
1,418
186
— $
—
37,259
—
—
1,660
—
—
—
—
—
51,996
58,312
113,092
12,421
109,788
1,660
5,722
1,770
5,722
1,418
186
December 31, 2018
Level I
Level II
Level III
Total
— $
—
—
—
6,027
—
—
—
—
—
—
—
77,430 $
50,115
50,639
10,308
3,272
75,807
—
1,375
8
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
1,375
343
853
104
The following table represents recurring level III assets:
(Dollars in thousands)
Balance at December 31, 2018
Realized and unrealized gains included in earnings
Purchase of securities
Reclassification to nonrecurring assets
Unrealized gain included in other comprehensive
income (loss)
Unrealized loss included in other comprehensive income
(loss)
Balance at December 31, 2019
Balance at December 31, 2017
$
$
$
Realized and unrealized losses 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
$
Assets Measured on a Nonrecurring Basis
Interest Rate Lock
Commitments
Municipal
Securities
Equity Securities
Total
1,750 $
(90)
—
—
—
—
1,660 $
1,426 $
324
—
—
—
—
1,750 $
33,122 $
—
842
—
18,128
(14,833)
37,259 $
22,909 $
—
6,232
—
4,191
(210)
33,122 $
300 $
—
—
(300)
—
—
— $
900 $
—
—
(600)
—
—
300 $
35,172
(90)
842
(300)
18,128
(14,833)
38,919
25,235
324
6,232
(600)
4,191
(210)
35,172
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 2019 and 2018 include certain foreclosed assets which,
upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses
and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down
included in other noninterest expense.
•
Impaired Loans — Loans for which it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired,
management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash
flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable
market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the
Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations,
comparable property analysis and contractual sales information.
•
Other Real Estate owned — Other real estate owned, which is obtained through the Bank’s foreclosure process is valued
utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or
Level III inputs based on customized discounting criteria. At the time the foreclosure is completed, the Company obtains a current
external appraisal.
•
Equity securities — Certain equity securities are recorded at fair value on a nonrecurring basis. Equity securities without
a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from
observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.
105
Assets measured at fair value on a nonrecurring basis as of December 31, 2019 and 2018 are included in the table below:
December 31, 2019
(Dollars in thousands)
Impaired loans
Other real estate owned
Equity securities
(Dollars in thousands)
Impaired loans
Other real estate owned
$
Level I
Level II
Level III
Total
— $
—
—
— $
—
—
8,909 $
1,397
18,514
8,909
1,397
18,514
December 31, 2018
Level I
Level II
Level III
$
— $
—
— $
—
11,735 $
2,145
Total
11,735
2,145
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities
measured at fair value at December 31, 2019 and 2018.
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
(Dollars in thousands)
December 31, 2019
Nonrecurring measurements:
Impaired loans
$
8,909
Appraisal of collateral 1
Other real estate owned
$
1,397
Appraisal of collateral 1
Appraisal adjustments 2
Liquidation expense 2
Appraisal adjustments 2
Liquidation expense 2
20% - 62%
5% - 10%
20% - 30%
5% - 10%
Equity securities
$
18,514
Net asset value
Cost minus impairment
0%
Recurring measurements:
Municipal securities (Local TIF bonds) $
Interest rate lock commitments
$
37,259
1,660
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
Pricing model
Pull through rates
77% - 82%
Quantitative Information about Level III Fair Value Measurements
Fair Value
Valuation Technique
Unobservable Input
Range
(Dollars in thousands)
December 31, 2018
Nonrecurring measurements:
Impaired loans
$
11,735
Appraisal of collateral 1
Other real estate owned
$
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%
Recurring measurements:
Municipal securities (Local TIF bonds)
Equity securities
$
$
33,122
300
1,750
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
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
80% - 88%
$
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.
106
NOTE 18. COMPREHENSIVE INCOME
The following tables present the components of accumulated other comprehensive income (“AOCI”) for the years ended
December 31:
(Dollars in thousands)
2019
Amount
Reclassified
from AOCI
2018
Amount
Reclassified
from AOCI
2017
Amount
Reclassified
from AOCI
Affected line item in the Statement where Net
Income is presented
Details about AOCI Components
Available-for-sale securities
Unrealized holding (loss) gain
Defined benefit pension plan items
Amortization of net actuarial loss
Investment hedge
Carrying value adjustment
$
(166) $
(166)
44
(122)
327 $
327
(88)
239
(271)
(271)
73
(198)
(44)
(44)
12
(32)
(306)
(306)
83
(223)
—
—
—
—
731
731
(292)
439
(241)
(241)
96
(145)
(Loss)/ 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
— Interest on investment securities - taxable
—
—
—
Total before tax
Income tax expense
Net of tax
Total reclassifications
$
(352) $
16 $
294
(Dollars in thousands)
Balance at January 1, 2019
Other comprehensive income (loss) before reclassification
Amounts reclassified from AOCI
Net current period OCI
Balance at December 31, 2019
Balance at January 1, 2018
Other comprehensive income (loss) before reclassification
Amounts reclassified from AOCI
Net current period OCI
Stranded AOCI
Mark to Market on equity positions held at December 31,
2017
Balance at December 31, 2018
$
$
$
$
Unrealized gains
(losses) on
available for-sale
securities
Defined benefit
pension plan items Investment Hedge
Total
(3,384) $
6,204
122
6,326
2,942 $
(5) $
(3,042)
(239)
(3,281)
—
(98)
(3,384) $
(3,422) $
(1,071)
198
(873)
(4,295) $
(2,983) $
(16)
223
207
(646)
—
(3,422) $
— $
—
32
32
32 $
— $
—
—
—
—
—
— $
(6,806)
5,133
352
5,485
(1,321)
(2,988)
(3,058)
(16)
(3,074)
(646)
(98)
(6,806)
107
NOTE 19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Information relative to the parent company’s condensed balance sheets at December 31, 2019 and 2018, and the related
condensed statements of income and cash flows for the years ended December 31, 2019, 2018 and 2017 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
(Loss)/ income before income taxes and undistributed earnings - continuing operations
Income tax (benefit) - continuing operations
(Loss)/ income after tax from continuing operations
Income from discontinued operations
Income tax - discontinued operations
Income after tax from discontinued operations
Equity in undistributed income earnings of subsidiaries
Net Income
Preferred dividends
Net Income available to common shareholders
December 31,
2019
2018
1,058 $
211,271
6,397
218,726 $
4,449
187,052
5,036
196,537
2,666 $
4,124
6,790
2,240
17,524
19,764
211,936
218,726 $
176,773
196,537
$
$
$
$
Year ended December 31,
2018
2019
6,280 $
14,296
(8,016)
(1,880)
(6,136)
575
148
427
32,700
26,991 $
8,906 $
13,439
(4,533)
(1,569)
(2,964)
—
—
—
14,967
12,003 $
2017
13,724
11,974
1,750
(2,147)
3,897
—
—
—
3,678
7,575
479 $
26,512 $
489 $
11,514 $
498
7,077
$
$
$
$
108
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
Net cash (used in) provided by operating activities
INVESTING ACTIVITIES
Investment in subsidiaries
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES
Proceeds from stock issuance
AOCI reclassification of pension and available-for-sale investments
Retirement of subordinated debt
Preferred stock redemption
Common stock options exercised
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Net cash (used in) provided by financing activities
(Decrease) increase in cash
Cash at beginning of period
Cash at end of period
Noncash common stock converted from subordinated debt
NOTE 20. SEGMENT REPORTING
2019
2018
2017
$
26,991 $
(32,700)
(4,104)
344
1,759
12,003 $
(14,967)
1,997
1,311
1,267
(7,710)
1,611
16,791
16,791
1,033
—
(12,400)
(500)
2,164
(2,290)
(479)
(12,472)
(3,391)
4,449
(2,194)
(2,194)
—
743
(35)
—
2,129
(1,220)
(489)
1,128
545
3,904
$
$
1,058 $
4,449 $
1,000 $
15,965 $
7,575
(3,678)
(2,214)
(234)
813
2,262
(947)
(947)
4,931
—
—
(8,500)
(10)
(1,033)
(498)
(5,110)
(3,795)
7,699
3,904
—
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 21, “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 21, “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 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.
109
Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended
December 31, 2019, 2018, and 2017 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
Commercial
& Retail
Banking
Mortgage
Banking
$
75,874 $
18,698
57,176
1,622
55,554
8,342 $
6,014
2,328
167
2,161
2019
Financial
Holding
Company
Intercompany
Eliminations Consolidated
82,361
22,961
59,400
1,789
57,611
(1,868) $
(2,520)
652
—
652
13 $
769
(756)
—
(756)
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 from discontinued operations
Income tax expense - discontinued operations
Net income from discontinued operations
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Capital Expenditures for the year ended December 31,
2019
Total Assets as of December 31, 2019
Goodwill as of December 31, 2019
$
$
$
657
23,033
23,690
19,067
25,070
44,137
41,040
1,289
42,329
28,432
8,136
36,568
—
6,268
6,268
8,676
4,851
13,527
(652)
(7,031)
(7,683)
—
(7,031)
(7,031)
35,107
8,175
26,932
—
—
—
26,932 $
—
26,932 $
7,922
2,155
5,767
—
—
—
5,767 $
—
5,767 $
(8,015)
(1,880)
(6,135)
575
148
427
(5,708) $
479
(6,187) $
—
—
—
—
—
—
— $
—
— $
41,045
23,559
64,604
56,175
31,026
87,201
35,014
8,450
26,564
575
148
427
26,991
479
26,512
1,438 $
1,953,975
2,748
112 $
248,382
16,882
492 $
216,411
—
— $
(474,654)
—
2,042
1,944,114
19,630
110
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Commercial &
Retail
Banking
Mortgage
Banking
$
63,762 $
13,667
50,095
2,386
47,709
6,667 $
4,085
2,582
54
2,528
2018
Financial
Holding
Company
Intercompany
Eliminations Consolidated
69,760
17,706
52,054
2,440
49,614
(674) $
(1,802)
1,128
—
1,128
5 $
1,756
(1,751)
—
(1,751)
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
585
6,479
7,064
14,924
20,081
35,005
19,768
4,265
15,503 $
—
15,503 $
32,880
(243)
32,637
23,927
8,608
32,535
—
6,411
6,411
7,373
4,309
11,682
(1,128)
(6,344)
(7,472)
—
(6,344)
(6,344)
2,630
677
1,953 $
—
1,953 $
(7,022)
(1,569)
(5,453) $
489
(5,942) $
—
—
— $
—
— $
32,337
6,303
38,640
46,224
26,654
72,878
15,376
3,373
12,003
489
11,514
2,284 $
1,753,932
1,598
272 $
165,430
16,882
137 $
196,537
—
— $
(364,930)
—
2,693
1,750,969
18,480
$
$
$
111
(Dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Commercial &
Retail
Banking
Mortgage
Banking
$
52,423 $
9,118
43,305
1,967
41,338
4,698 $
2,317
2,381
206
2,175
2017
Financial
Holding
Company
Intercompany
Eliminations Consolidated
56,598
12,301
44,297
2,173
42,124
(527) $
(1,375)
848
—
848
4 $
2,241
(2,237)
—
(2,237)
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
736
5,866
6,602
12,266
19,523
31,789
16,151
5,820
10,331 $
—
10,331 $
37,262
(2,372)
34,890
26,196
8,188
34,384
—
5,466
5,466
5,646
4,085
9,731
(849)
(5,403)
(6,252)
—
(5,404)
(5,404)
2,681
1,082
1,599 $
—
1,599 $
(6,502)
(2,147)
(4,355) $
498
(4,853) $
—
—
— $
—
— $
37,149
3,557
40,706
44,108
26,392
70,500
12,330
4,755
7,575
498
7,077
$
$
Capital Expenditures for the year ended December 31, 2017 $
Total Assets as of December 31, 2017
Goodwill as of December 31, 2017
3,226 $
1,533,497
1,598
1,187 $
149,323
16,882
83 $
184,674
—
— $
(333,192)
—
4,496
1,534,302
18,480
Commercial & Retail Banking
For the year ended December 31, 2019, the Commercial & Retail Banking segment earned $26.9 million compared to $15.5
million in 2018. Net interest income increased by $7.1 million, primarily as the result of a $11.9 million increase in interest and
fees on loans which was offset by a $5.8 million increase in interest on deposits. Noninterest income increased by $16.6 million,
primarily as the result of a $13.1 million increase in the holding gain on equity securities and a $1.2 million increase in
commercial swap fee income. Noninterest expense increased by $9.1 million, primarily as the result of the following: $4.1 million
increase in salaries and employee benefits expense, $1.1 million increase in occupancy and equipment expense, a $1.4 million
increase in professional fees, a $928 thousand increase in other operating expenses, and a $811 thousand increase in travel,
entertainment, dues, and subscriptions. The increase in salaries and employee benefits was largely driven by a $2.0 million
increase related to the build-out of other Company administration, a $1.4 million increase related to the build-out of the Fintech
team, and $623 thousand related to additional team members acquired as a result of the Chartwell acquisition. The increase in
professional fees is related to special projects and Fintech product and technology development. The increase in travel,
entertainment, dues, and subscriptions is primarily related to the Fintech team. In addition, provision expense decreased by $764
thousand. Also, income tax expense increased $3.9 million as a result of increased earnings.
Mortgage Banking
For the year ended December 31, 2019, the Mortgage Banking segment earned $5.8 million compared to $2.0 million in 2018.
Net interest income decreased $254 thousand, noninterest income increased by $9.7 million, and noninterest expense increased by
$4.0 million. The increase in noninterest income was primarily the result of a $8.2 million increase in mortgage fee income and a
$1.5 million increase in the gain on derivative. The increase in noninterest expense was primarily the result of the following: $4.5
million increase in salaries and employee benefits expense, which was primarily due to a 30.3% increase in origination volume
and a $516 thousand increase in the earn out paid to management of the mortgage company related to a 2012 acquisition. Other
items that impacted noninterest expense were a $510 thousand decrease in mortgage processing expense and a $475 thousand
increase in travel, entertainment, dues, and subscriptions expense.
112
Financial Holding Company
For the year ended December 31, 2019, the Financial Holding Company segment lost $5.7 million compared to a loss of $5.5
million in 2018. Interest expense decreased $987 thousand, noninterest income decreased $143 thousand, and noninterest expense
increased $1.8 million. In addition, the income tax benefit increased $163 thousand. The increase in noninterest expense was
primarily due to a $1.3 million increase in salaries and employee benefits expense related to increased incentive and stock-based
compensation.
NOTE 21. 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.
Based on a measurement period that ended June 30, 2019, the Company earned and was reasonably assured to receive an
estimated earn-out payment of $600 thousand related to the Asset Purchase Agreement with USI. This estimate was recorded as
contingent consideration from discontinued operations. On August 27, 2019, the Company adjusted the estimate recorded in the
second quarter of 2019 to match the earn-out payment received of $575 thousand.
There were no assets and liabilities of discontinued operations as of December 31, 2019 or 2018.
Net income from discontinued operations, net of tax, for the years ended December 31, 2019, 2018, and 2017, were as follows:
(Dollars in thousands)
NONINTEREST INCOME
Other operating income
Total noninterest income
2017
2019
2018
575
575
—
—
—
—
Income from discontinued operations, before income taxes
Income tax expense - discontinued operations
Net Income from discontinued operations
$
575
148
427 $
—
—
— $
—
—
—
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings Per Share
(Dollars in thousands)
2019
First quarter
Second quarter
Third quarter
Fourth quarter
(Dollars in thousands)
2018
First quarter
Second quarter
Third quarter
Fourth quarter
Interest
Income
Net Interest
Income
Income Before
Taxes
Net Income
Basic
Diluted
$
19,623 $
20,470
21,038
21,230
13,972 $
14,529
15,034
15,865
3,989 $
20,526
5,668
5,406
3,192 $
15,377
4,327
4,095
0.26 $
1.31
0.36
0.34
0.26
1.18
0.35
0.32
Interest
Income
Net Interest
Income
Income Before
Taxes
Net Income
Basic
Diluted
Earnings Per Share
$
15,054 $
16,944
18,176
19,586
11,465 $
12,655
13,524
14,410
3,291 $
3,596
4,549
3,940
2,594 $
2,831
3,579
2,999
0.24 $
0.25
0.30
0.25
0.23
0.25
0.29
0.24
113
NOTE 23. REVENUE RECOGNITION
The Company records revenue from contracts with customers in accordance with Accounting Standards Update (“ASU”) 2014-
09, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the contract with a
customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the
performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.
Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in
previous periods.
The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities, and other
financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with
customers and determined that further disaggregation of revenue from contracts with customers into more granular categories
beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its
performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed;
charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and
the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination
of the amount and timing of revenue from contracts with customers.
The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs
should be presented as expenses or contract-revenue (i.e. gross versus net). Based on the evaluation, the Company determined that
the classification of certain debit and credit card processing related costs should change (i.e. costs previously recorded as expense
in now recorded as contract-revenue). These classification changes resulted in immaterial changes to both revenue and expense.
Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained
earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period
amounts related to the debit and credit card related cost reclassifications discussed above.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees, monthly service fees, check orders, and other deposit
account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally
satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit
account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related
revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in
the following month through a direct charge to customers’ accounts.
Debit Card and Interchange Income
Debit card and interchange income is primarily comprised of interchange fees earned whenever the Bank’s debit and credit cards
are processed through card payment networks, such as Visa. The Bank’s performance obligation for debit card and interchange
income is generally satisfied, and the related revenue recognized, on a transactional basis. Payment is typically received
immediately or in the following month.
Consulting Income
Consulting income is comprised of consulting revenue generated by Chartwell. Chartwell provides integrated regulatory
compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting,
outsourcing, testing and training solutions. Chartwell accounts for a contract after it has been approved by all parties to the
arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and
collectability of consideration is probable. Chartwell evaluates the services promised in each contract at inception to determine
whether the contract should be accounted for as having one or more performance obligations. Chartwell's services included in its
contracts are distinct from one another. Chartwell determines the transaction price for each contract based upon the consideration
it expects to receive for the distinct services being provided under the contract. Chartwell recognizes revenue as performance
obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance
obligations are satisfied, Chartwell considers factors such as contract terms, payment terms, an whether there is an alternative
future use of the product or service. Consulting engagements may vary in length and scope, but will generally include the review
and/or preparation of regulatory filings, business plans, financial models, and other risk management services to customers within
financial industries. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting
agreement.
114
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)
Service charges on deposit accounts
Debit card and interchange income
Consulting income
Other
2019
2017
2018
$
1,409 $
571
921
499
3,400
61,204
64,604 $
1,033 $
647
—
558
2,238
36,402
38,640 $
765
1,258
—
260
2,283
38,423
40,706
Noninterest income in scope of Topic 606
Noninterest income out of scope of Topic 606
Total noninterest income
$
NOTE 24. BUSINESS COMBINATION
On September 13, 2019 the Bank purchased full equity rights of Chartwell Compliance headquartered in Bethesda, Maryland.
Purchase consideration for the acquisition totaled $4.1 million, including a cash payment of $3.1 million and the delivery
$1.0 million of MVB common stock. Additionally, contingent consideration will be given to the previous owners if outlined
future financial conditions of the company are met. Management estimated the fair value of the earnout utilizing the Black-
Scholes option pricing model.
Chartwell Compliance provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk
management services that include consulting, outsourcing, testing and training solutions. As a stand-alone subsidiary of MVB
Bank, Inc., Chartwell Compliance will expand its services to both Fintech and bank clients. Chartwell will coordinate with MVB
Bank’s current compliance officers and be charged to help create and implement strategy and provide expert compliance
resources to aid MVB in carrying out stringent and faster new client due diligence. Chartwell also will conduct enhanced
monitoring and testing of clients.
The Company has accounted for the purchases under the acquisition method of accounting in accordance with FASB ASC topic
805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair
values as of their acquisition date. The acquired assets and assumed liabilities of Chartwell Compliance were measured at
estimated fair value. Management made significant estimates and exercised significant judgment in accounting for the acquisition
of Chartwell Compliance.
115
The following table provides the purchase price as of the acquisition date, the identifiable assets acquired and liabilities assumed
at their estimated fair values, and the resulting goodwill of $1.2 million recorded from the acquisition.
(Dollars in thousands)
Purchase price consideration:
Cash consideration
Closing MVB shares
Total purchase consideration
Assets acquired at fair value:
Cash and cash equivalents
Accounts receivable
Furniture and equipment, net
Intangibles, net
Total fair value of assets acquired
Liabilities assumed at fair value:
Other liabilities
Total fair value of liabilities acquired
Net assets acquired at fair value:
Amount of goodwill resulting from acquisition
NOTE 25. SUBSEQUENT EVENT
As of September 13, 2019
3,077
1,033
4,110
426
165
4
3,220
3,815
855
855
2,960
1,150
$
$
$
$
$
$
$
$
On March 2, 2020, the Bank and PMG (dba MVB Mortgage), entered into an Agreement by and among the Bank, PMG,
Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter
Cameron, providing for the combination of the mortgage origination services businesses of PMG and Intercoastal.
Pursuant to the terms of the Agreement, on the closing date, Intercoastal will convert into a Virginia limited liability company and
PMG will contribute substantially all of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital
contribution, in exchange for common units of Intercoastal, representing 47% of the common interest of Intercoastal, as well as
$7.5 million in preferred units (the “Transaction”). The completion of the Transaction is subject to certain regulatory approvals,
conditions precedent and normal customary closing conditions. Subject to the satisfaction of such conditions, the Transaction is
expected to close in the second quarter of 2020. In the Agreement, the Bank, MVB Mortgage, and Intercoastal have made
customary representations, warranties, and covenants, including covenants to enter into ancillary agreements related to the
Transaction and the operation of the business following the completion of the Transaction. MVB will recognize its ownership as a
fair value equity investment and will no longer consolidate MVB Mortgage’s financial results.
116
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.
generally accepted accounting.
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, 2019, 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 13,
2020 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 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.
Baltimore, Maryland
March 13, 2020
117
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, 2019, of the design and
operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the 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,
2019.
There have been no material changes in the Company’s internal control over financial reporting during the fourth quarter of 2019
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, 2019.
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, 2019, 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 13, 2020
Date: March 13, 2020
/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)
118
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 2019 that materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
119
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of MVB Financial Corp.
Opinion on Internal Control Over Financial Reporting
We have audited MVB Financial Corp. and Subsidiary’s internal control over financial reporting as of
December 31, 2019, 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 (the “Company”) maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, 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, 2019 and 2018 and for each of the three years in the period ended
December 31, 2019, and our report dated March 13, 2020, 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 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, 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
120
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.
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.
Baltimore, Maryland
March 13, 2020
121
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 2020 Annual Meeting of
Shareholders (the “Proxy Statement”) not later than 120 days after December 31, 2019. 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, 2019. 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 disclosed
below) 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, 2019. The applicable information appearing in the Proxy Statement is incorporated by
reference.
Equity Compensation Plan Information as of December 31, 2019:
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)
1,049,516 $
N/A
1,049,516 $
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)
14.41
N/A
14.41
715.517
N/A
715.517
During 2019, 210,050 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, 2019. 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, 2019. The applicable information appearing in the
Proxy Statement is incorporated by reference.
122
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, 2019 and 2018
Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
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.
123
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 13, 2020
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
/s/ Cheryl D. Spielman
Cheryl D. Spielman, Director
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
Date: March 13, 2020
124
EXHIBIT INDEX
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
Description
Membership Interest Purchase Agreement, dated as of
December 3, 2012, by and among MVB Bank, Inc.,
MVB Financial Corp., Potomac Mortgage Group, LLC
and the Members of Potomac Mortgage Group, LLC
Articles of Incorporation, as amended
Second Amended and Restated Bylaws, as amended
Specimen of Stock Certificate representing MVB
Financial Corp. Common Stock
Form of Subscription Rights Certificate
Description of Securities
10.1†
MVB Financial Corp. 2003 Stock Incentive Plan
10.2†
10.3†
10.4
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12
14
21
23.1
24
MVB Financial Corp. 2013 Stock Incentive Plan, as
amended
MVB Financial Corp. 2018 Annual Senior Executive
Performance Incentive Plan
Lease Agreement with Essex Properties, LLC for land
occupied by Bridgeport Branch
Employment Agreement of Larry F. Mazza
Employment Agreement of Donald T. Robinson
Offer Letter for Donald T. Robinson
Investment Agreement between MVB Financial Corp.
and Larry F. Mazza
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
MVB Financial Corp. Form of Restricted Stock Unit
Grant Notice and Restricted Stock Unit Agreement
Purchase and Assumption Agreement, dated November
21, 2019, by and between MVB Bank and Summit
Community Bank, Inc.
Code of Ethics
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting
Firm
Power of Attorney
Exhibit Location
Form 8-K, File No. 000-50567, filed December 3, 2012,
and incorporated by reference herein
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 March 13, 2017,
and incorporated by reference herein
Filed herewith
Form SB-2 Registration Statement, File No. 333-
120931, filed December 2, 2004, and incorporated by
reference herein
Form 10-K, File No. 001-38314, filed March 8, 2018,
and incorporated by reference herein
Form 8-K, File No. 001-38314, filed February 23, 2018,
and incorporated by reference herein
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
Form 8-K, File No. 000-50567, filed March 13, 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
Quarterly Report on Form 10-Q, File No. 000-50567,
filed July 31, 2017, and incorporated by reference
herein
Form 8-K, File No. 001-38314, filed March 27, 2018,
and incorporated by reference herein
Form 8-K, File No. 001-38314, filed November 22,
2019, and incorporated by reference herein
Filed herewith
Filed herewith
Filed herewith
Contained in signature page to this Annual Report on
Form 10-K
125
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
Filed herewith
Filed herewith
Filed herewith
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
(*) 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
126
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