Notes to the Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Nature of Operations
MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank”). MVB Bank’s operating subsidiaries include MVB Mortgage, MVB Insurance, LLC (“MVB Insurance”), and MVB Community Development Corporation (“CDC”).
Principles of Consolidation and Basis of Presentation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10‑Q. Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of
December 31, 2017
has been derived from audited financial statements included in the Company’s
2017
filing on Form 10-K. Operating results for the
three
months ended
March 31, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s
December 31, 2017
, Form 10-K filed with the Securities and Exchange Commission (the "SEC").
In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.
Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606).
Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contract-revenue (i.e. gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card processing related costs should change (i.e. costs previously recorded as expense in now recorded as contract-revenue). These classification changes resulted in immaterial changes to both revenue and expense. Since
there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts related to the debit and credit card related cost reclassifications discussed above.
Note 2 – Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This update requires a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act, which was enacted on December 22, 2017. The Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amendments in the ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which amounted to
$646 thousand
.
In March 2017, the FASB issued ASU 2017-08,
Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2018, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it is our current policy to amortize premiums of investment securities to the earliest call date.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. Topic 350, Intangibles
–
Goodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit to address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805):
Clarifying the Definition of a Business,” (“ASU 2017-01”)
to improve such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 was effective for the Company on January 1, 2018 and is to be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company's project management team and Management Loan Committee ("MLC") engaged a third party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist with implementation that will be tested throughout 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:(1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company established a project management team, which is currently evaluating the impact of the new standard, and expects an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.
In January 2016, the FASB issued ASU 2016-01,
Accounting for Financial Instruments - Overall: Classification and Measurement (Subtopic 825-10)
. Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2018. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company's Consolidated Financial Statements. In accordance with (5) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion. See Note 6 "Fair Value of Financial Instruments" of the Notes to Consolidated Financial Statements for further information.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. The Company evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company determined that this standard did not have a material impact on its consolidated financial statements because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards and out of scope of ASC 606 revenue standard. The Company evaluated the impact of this standard on individual customer contracts, while management evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company adopted the revenue recognition standard as of January 1, 2018 and it did not have a material effect on the consolidated financial statements. See Note 1 "Summary of Significant Policies" of the Notes to the Consolidated Financial Statements for further information.
Note 3 – Investment Securities
There were
no
held-to-maturity securities at
March 31, 2018
or
December 31, 2017
.
Amortized cost and fair values of investment securities available-for-sale at
March 31, 2018
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
U. S. Agency securities
|
|
$
|
82,518
|
|
|
$
|
91
|
|
|
$
|
(1,814
|
)
|
|
$
|
80,795
|
|
U.S. Sponsored Mortgage-backed securities
|
|
58,827
|
|
|
—
|
|
|
(2,509
|
)
|
|
56,318
|
|
Municipal securities
|
|
80,839
|
|
|
996
|
|
|
(1,730
|
)
|
|
80,105
|
|
Total debt securities
|
|
222,184
|
|
|
1,087
|
|
|
(6,053
|
)
|
|
217,218
|
|
Other securities
|
|
9,235
|
|
|
87
|
|
|
(36
|
)
|
|
9,286
|
|
Total investment securities available-for-sale
|
|
$
|
231,419
|
|
|
$
|
1,174
|
|
|
$
|
(6,089
|
)
|
|
$
|
226,504
|
|
Amortized cost and fair values of investment securities available-for-sale at
December 31, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Fair Value
|
U. S. Agency securities
|
|
$
|
81,705
|
|
|
$
|
81
|
|
|
$
|
(841
|
)
|
|
$
|
80,945
|
|
U.S. Sponsored Mortgage-backed securities
|
|
59,387
|
|
|
31
|
|
|
(1,264
|
)
|
|
58,154
|
|
Municipal securities
|
|
74,482
|
|
|
1,733
|
|
|
(373
|
)
|
|
75,842
|
|
Total debt securities
|
|
215,574
|
|
|
1,845
|
|
|
(2,478
|
)
|
|
214,941
|
|
Equity and other securities
|
|
15,940
|
|
|
644
|
|
|
(18
|
)
|
|
16,566
|
|
Total investment securities available-for-sale
|
|
$
|
231,514
|
|
|
$
|
2,489
|
|
|
$
|
(2,496
|
)
|
|
$
|
231,507
|
|
The following table summarizes amortized cost and fair values of debt securities by maturity:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Available for sale
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Within one year
|
|
$
|
524
|
|
|
$
|
528
|
|
After one year, but within five
|
|
46,954
|
|
|
46,525
|
|
After five years, but within ten
|
|
23,841
|
|
|
22,947
|
|
After ten years
|
|
150,865
|
|
|
147,218
|
|
Total
|
|
$
|
222,184
|
|
|
$
|
217,218
|
|
Investment securities with a carrying value of
$117.4 million
at
March 31, 2018
, were pledged to secure public funds, repurchase agreements, and potential borrowings at the Federal Reserve discount window.
The Company’s investment portfolio includes securities that are in an unrealized loss position as of
March 31, 2018
, the details of which are included in the following table. Although these securities, if sold at
March 31, 2018
would result in a pretax loss of
$6.1 million
, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. Management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis. Declines in the fair values of these securities can be traced to general market conditions which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated. As of
March 31, 2018
, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline in fair value.
The following table discloses investments in an unrealized loss position at
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than 12 months
|
|
12 months or more
|
Description and number of positions
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
U.S. Agency securities (45)
|
|
$
|
62,984
|
|
|
$
|
(1,471
|
)
|
|
$
|
7,789
|
|
|
$
|
(343
|
)
|
U.S. Sponsored Mortgage-backed securities (42)
|
|
19,632
|
|
|
(541
|
)
|
|
39,196
|
|
|
(1,968
|
)
|
Municipal securities (86)
|
|
28,748
|
|
|
(827
|
)
|
|
18,100
|
|
|
(903
|
)
|
Other securities (3)
|
|
$
|
2,549
|
|
|
$
|
(36
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
113,913
|
|
|
$
|
(2,875
|
)
|
|
$
|
65,085
|
|
|
$
|
(3,214
|
)
|
The following table discloses investments in an unrealized loss position at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Less than 12 months
|
|
12 months or more
|
Description and number of positions
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
U.S. Agency securities (45)
|
|
$
|
61,834
|
|
|
$
|
(659
|
)
|
|
$
|
7,709
|
|
|
$
|
(182
|
)
|
U.S. Sponsored Mortgage-backed securities (39)
|
|
16,825
|
|
|
(159
|
)
|
|
37,427
|
|
|
(1,105
|
)
|
Municipal securities (47)
|
|
8,826
|
|
|
(48
|
)
|
|
16,781
|
|
|
(325
|
)
|
Equity and other securities (2)
|
|
1,034
|
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
|
$
|
88,519
|
|
|
$
|
(884
|
)
|
|
$
|
61,917
|
|
|
$
|
(1,612
|
)
|
For the
three
month periods ended
March 31, 2018
and
2017
, the Company sold investments available-for-sale of
$680 thousand
,
$22.9 million
, respectively. These sales resulted in gross gains of
$326 thousand
and
$549 thousand
and gross losses of
$0
and
$366 thousand
, respectively.
For the three months ended
March 31, 2018
, the Company recognized an unrealized loss of
$30 thousand
on equity securities held as of
March 31, 2018
, which was recorded in noninterest income in the consolidated statements of income.
Note 4 – Loans and Allowance for Loan Losses
The components of loans in the Consolidated Balance Sheet at
March 31, 2018
and
December 31, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Commercial and Non-Residential Real Estate
|
|
$
|
824,625
|
|
|
$
|
783,909
|
|
Residential Real Estate
|
|
260,513
|
|
|
246,214
|
|
Home Equity
|
|
59,526
|
|
|
62,400
|
|
Consumer
|
|
11,909
|
|
|
12,783
|
|
Total Loans
|
|
$
|
1,156,573
|
|
|
$
|
1,105,306
|
|
Deferred loan origination fees and costs, net
|
|
600
|
|
|
635
|
|
Loans receivable
|
|
$
|
1,157,173
|
|
|
$
|
1,105,941
|
|
All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan.
An allowance for loan losses ("ALL") is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the
two
components represents the Bank’s ALL. The Bank's methodology allows for the analysis of certain impaired loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit, and consumer loans, when considered impaired, are
evaluated collectively for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans. Total collectively evaluated impaired loans were
$1.4 million
and
$1.3 million
, while the related reserves were
$173 thousand
and
$169 thousand
as of
March 31, 2018
and
December 31, 2017
.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by qualified factors.
The segments described below in the impaired loans by class table, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and bank management tracks the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling
12
quarters.
“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, conclusion of loan reviews, audits, and exams, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions consumer sentiment, and other external factors. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.
To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-revolving lines of credit, and revolving lines of credit, and based its calculation on the expectation of future advances of each loan category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition, many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.
Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which Management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. As of
March 31, 2018
and
December 31, 2017
, the liability for unfunded commitments related to loans held for investment was
$284 thousand
.
Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The ALL is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
ALL balance at December 31, 2017
|
|
$
|
7,804
|
|
|
$
|
1,119
|
|
|
$
|
705
|
|
|
$
|
250
|
|
|
$
|
9,878
|
|
Charge-offs
|
|
(324
|
)
|
|
(11
|
)
|
|
—
|
|
|
(21
|
)
|
|
(356
|
)
|
Recoveries
|
|
2
|
|
|
9
|
|
|
56
|
|
|
4
|
|
|
71
|
|
Provision
|
|
516
|
|
|
60
|
|
|
(68
|
)
|
|
(34
|
)
|
|
474
|
|
ALL balance at March 31, 2018
|
|
$
|
7,998
|
|
|
$
|
1,177
|
|
|
$
|
693
|
|
|
$
|
199
|
|
|
$
|
10,067
|
|
Individually evaluated for impairment
|
|
$
|
915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
915
|
|
Collectively evaluated for impairment
|
|
$
|
7,083
|
|
|
$
|
1,177
|
|
|
$
|
693
|
|
|
$
|
199
|
|
|
$
|
9,152
|
|
The following table summarizes the primary segments of the Company loan portfolio as of
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
Individually evaluated for impairment
|
|
$
|
12,957
|
|
|
$
|
1,707
|
|
|
$
|
44
|
|
|
$
|
43
|
|
|
$
|
14,751
|
|
Collectively evaluated for impairment
|
|
811,668
|
|
|
258,806
|
|
|
59,482
|
|
|
11,866
|
|
|
1,141,822
|
|
Total Loans
|
|
$
|
824,625
|
|
|
$
|
260,513
|
|
|
$
|
59,526
|
|
|
$
|
11,909
|
|
|
$
|
1,156,573
|
|
The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
ALL balance at December 31, 2016
|
|
$
|
7,181
|
|
|
$
|
990
|
|
|
$
|
728
|
|
|
$
|
202
|
|
|
$
|
9,101
|
|
Charge-offs
|
|
(113
|
)
|
|
(141
|
)
|
|
(33
|
)
|
|
(3
|
)
|
|
(290
|
)
|
Recoveries
|
|
9
|
|
|
32
|
|
|
1
|
|
|
1
|
|
|
43
|
|
Provision
|
|
208
|
|
|
204
|
|
|
94
|
|
|
12
|
|
|
518
|
|
ALL balance at March 31, 2017
|
|
$
|
7,285
|
|
|
$
|
1,085
|
|
|
$
|
790
|
|
|
$
|
212
|
|
|
$
|
9,372
|
|
Individually evaluated for impairment
|
|
$
|
279
|
|
|
$
|
46
|
|
|
$
|
36
|
|
|
$
|
25
|
|
|
$
|
386
|
|
Collectively evaluated for impairment
|
|
$
|
7,006
|
|
|
$
|
1,039
|
|
|
$
|
754
|
|
|
$
|
187
|
|
|
$
|
8,986
|
|
The following table summarizes the primary segments of the Company loan portfolio as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
Residential
|
|
Home Equity
|
|
Consumer
|
|
Total
|
Individually evaluated for impairment
|
|
$
|
10,300
|
|
|
$
|
1,356
|
|
|
$
|
647
|
|
|
$
|
125
|
|
|
$
|
12,428
|
|
Collectively evaluated for impairment
|
|
742,031
|
|
|
243,250
|
|
|
64,523
|
|
|
13,636
|
|
|
1,063,440
|
|
Total Loans
|
|
$
|
752,331
|
|
|
$
|
244,606
|
|
|
$
|
65,170
|
|
|
$
|
13,761
|
|
|
$
|
1,075,868
|
|
Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company evaluates residential mortgage loans, home equity lines of credit, and consumer loans in homogeneous pools, rather than on an individual basis, when each of those loans are below specific thresholds based on outstanding principal balance. Such loans that individually exceed these thresholds are evaluated individually for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow Management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.
Once the determination has been made that a loan is impaired, the amount of the impairment is measured using
one
of
three
valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with Specific Allowance
|
|
Impaired Loans with No Specific Allowance
|
|
Total Impaired Loans
|
(Dollars in thousands)
|
|
Recorded Investment
|
|
Related Allowance
|
|
Recorded Investment
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
139
|
|
|
$
|
76
|
|
|
$
|
4,738
|
|
|
$
|
4,877
|
|
|
$
|
4,898
|
|
Commercial Real Estate
|
|
4,026
|
|
|
839
|
|
|
2,762
|
|
|
6,788
|
|
|
7,596
|
|
Acquisition & Development
|
|
—
|
|
|
—
|
|
|
1,292
|
|
|
1,292
|
|
|
3,572
|
|
Total Commercial
|
|
4,165
|
|
|
915
|
|
|
8,792
|
|
|
12,957
|
|
|
16,066
|
|
Residential
|
|
—
|
|
|
—
|
|
|
1,707
|
|
|
1,707
|
|
|
1,755
|
|
Home Equity
|
|
—
|
|
|
—
|
|
|
44
|
|
|
44
|
|
|
44
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
43
|
|
|
43
|
|
|
49
|
|
Total Impaired Loans
|
|
$
|
4,165
|
|
|
$
|
915
|
|
|
$
|
10,586
|
|
|
$
|
14,751
|
|
|
$
|
17,914
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
3,283
|
|
|
$
|
22
|
|
|
$
|
979
|
|
|
$
|
4,262
|
|
|
$
|
4,275
|
|
Commercial Real Estate
|
|
4,603
|
|
|
1,150
|
|
|
2,814
|
|
|
7,417
|
|
|
7,921
|
|
Acquisition & Development
|
|
—
|
|
|
—
|
|
|
2,117
|
|
|
2,117
|
|
|
4,090
|
|
Total Commercial
|
|
7,886
|
|
|
1,172
|
|
|
5,910
|
|
|
13,796
|
|
|
16,286
|
|
Residential
|
|
—
|
|
|
—
|
|
|
1,569
|
|
|
1,569
|
|
|
1,601
|
|
Home Equity
|
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
|
13
|
|
Consumer
|
|
69
|
|
|
16
|
|
|
109
|
|
|
178
|
|
|
475
|
|
Total Impaired Loans
|
|
$
|
7,955
|
|
|
$
|
1,188
|
|
|
$
|
7,601
|
|
|
$
|
15,556
|
|
|
$
|
18,375
|
|
Impaired loans have decreased by
$805 thousand
, or
5.2%
, during the
first
quarter of
2018
. This change is the net effect of multiple factors, including the identification of
$1.0 million
of impaired loans, principal curtailments of
$307 thousand
, partial charge-offs of
$335 thousand
, the foreclosure of a commercial development loan which required the reclassification of
$720 thousand
to other real estate owned, the classification of
$292 thousand
to performing loans based on improved repayment performance, and normal loan amortization.
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
(Dollars in thousands)
|
|
Average Investment in Impaired Loans
|
|
Interest Income Recognized on Accrual Basis
|
|
Interest Income Recognized on Cash Basis
|
|
Average Investment in Impaired Loans
|
|
Interest Income Recognized on Accrual Basis
|
|
Interest Income Recognized on Cash Basis
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
4,525
|
|
|
$
|
38
|
|
|
$
|
53
|
|
|
$
|
3,349
|
|
|
$
|
39
|
|
|
$
|
13
|
|
Commercial Real Estate
|
|
7,431
|
|
|
21
|
|
|
23
|
|
|
2,803
|
|
|
25
|
|
|
26
|
|
Acquisition & Development
|
|
1,837
|
|
|
—
|
|
|
—
|
|
|
3,775
|
|
|
2
|
|
|
3
|
|
Total Commercial
|
|
13,793
|
|
|
59
|
|
|
76
|
|
|
9,927
|
|
|
66
|
|
|
42
|
|
Residential
|
|
1,747
|
|
|
5
|
|
|
48
|
|
|
1,417
|
|
|
2
|
|
|
17
|
|
Home Equity
|
|
65
|
|
|
—
|
|
|
—
|
|
|
653
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
132
|
|
|
—
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
15,737
|
|
|
$
|
64
|
|
|
$
|
124
|
|
|
$
|
12,139
|
|
|
$
|
68
|
|
|
$
|
59
|
|
As of
March 31, 2018
, the Bank's other real estate owned balance totaled
$1.9 million
. The Bank held
nine
foreclosed residential real estate properties representing
$890 thousand
, or
47%
, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily
two
commercial loan relationships, one of which included
three
properties for a total of
$395 thousand
, while the other also included
three
properties for a total of
$178 thousand
. The
three
remaining residential real estate properties, totaling
$317 thousand
, were result of the foreclosure of
three
unrelated borrowers. The remaining
$1.0 million
, or
53%
, of other real estate owned is the result of the foreclosure of
three
unrelated commercial development loans. There are
two
additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was
$329 thousand
as of
March 31, 2018
. These loans are included in the table above and have
$0
in specific allowance allocated to them.
Bank management uses a
nine
-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first
six
categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all commercial relationships of
one million
dollars or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Bank’s Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pass
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
380,106
|
|
|
$
|
4,793
|
|
|
$
|
4,547
|
|
|
$
|
—
|
|
|
$
|
389,446
|
|
Commercial Real Estate
|
|
304,669
|
|
|
14,553
|
|
|
2,394
|
|
|
4,236
|
|
|
325,852
|
|
Acquisition & Development
|
|
105,111
|
|
|
994
|
|
|
2,230
|
|
|
992
|
|
|
109,327
|
|
Total Commercial
|
|
789,886
|
|
|
20,340
|
|
|
9,171
|
|
|
5,228
|
|
|
824,625
|
|
Residential
|
|
257,307
|
|
|
2,879
|
|
|
205
|
|
|
122
|
|
|
260,513
|
|
Home Equity
|
|
58,413
|
|
|
1,074
|
|
|
39
|
|
|
—
|
|
|
59,526
|
|
Consumer
|
|
11,695
|
|
|
191
|
|
|
16
|
|
|
7
|
|
|
11,909
|
|
Total Loans
|
|
$
|
1,117,301
|
|
|
$
|
24,484
|
|
|
$
|
9,431
|
|
|
$
|
5,357
|
|
|
$
|
1,156,573
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
371,041
|
|
|
$
|
4,816
|
|
|
$
|
4,506
|
|
|
$
|
—
|
|
|
$
|
380,363
|
|
Commercial Real Estate
|
|
271,751
|
|
|
22,995
|
|
|
5,961
|
|
|
1,149
|
|
|
301,856
|
|
Acquisition & Development
|
|
96,712
|
|
|
931
|
|
|
2,230
|
|
|
1,817
|
|
|
101,690
|
|
Total Commercial
|
|
739,504
|
|
|
28,742
|
|
|
12,697
|
|
|
2,966
|
|
|
783,909
|
|
Residential
|
|
242,823
|
|
|
3,036
|
|
|
223
|
|
|
132
|
|
|
246,214
|
|
Home Equity
|
|
61,037
|
|
|
1,311
|
|
|
52
|
|
|
—
|
|
|
62,400
|
|
Consumer
|
|
12,453
|
|
|
174
|
|
|
25
|
|
|
131
|
|
|
12,783
|
|
Total Loans
|
|
$
|
1,055,817
|
|
|
$
|
33,263
|
|
|
$
|
12,997
|
|
|
$
|
3,229
|
|
|
$
|
1,105,306
|
|
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and or the MLC, as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches
90 days
past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless Management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires a
six
-month recent history of payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and or MLC.
Management is currently monitoring the payment performance of a
$3.2 million
commercial loan that has paid slow in recent months. This loan is classified as a troubled debt restructured loan based on multiple interest only periods being provided in the past, however, as of March 31, 2018, this loan was paid current. The borrower has continued to work through ongoing litigation, resolution of which is expected in the near future.
The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90+ Days Past Due
|
|
Total Past Due
|
|
Total Loans
|
|
Non-Accrual
|
|
90+ Days Still Accruing
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
387,428
|
|
|
$
|
473
|
|
|
$
|
393
|
|
|
$
|
1,152
|
|
|
$
|
2,018
|
|
|
$
|
389,446
|
|
|
$
|
1,758
|
|
|
$
|
—
|
|
Commercial Real Estate
|
|
321,198
|
|
|
1,188
|
|
|
—
|
|
|
3,466
|
|
|
4,654
|
|
|
325,852
|
|
|
4,664
|
|
|
—
|
|
Acquisition & Development
|
|
108,035
|
|
|
860
|
|
|
—
|
|
|
432
|
|
|
1,292
|
|
|
109,327
|
|
|
1,292
|
|
|
—
|
|
Total Commercial
|
|
816,661
|
|
|
2,521
|
|
|
393
|
|
|
5,050
|
|
|
7,964
|
|
|
824,625
|
|
|
7,714
|
|
|
—
|
|
Residential
|
|
255,659
|
|
|
4,417
|
|
|
108
|
|
|
329
|
|
|
4,854
|
|
|
260,513
|
|
|
1,301
|
|
|
—
|
|
Home Equity
|
|
59,050
|
|
|
194
|
|
|
282
|
|
|
—
|
|
|
476
|
|
|
59,526
|
|
|
44
|
|
|
—
|
|
Consumer
|
|
11,831
|
|
|
28
|
|
|
19
|
|
|
31
|
|
|
78
|
|
|
11,909
|
|
|
43
|
|
|
—
|
|
Total Loans
|
|
$
|
1,143,201
|
|
|
$
|
7,160
|
|
|
$
|
802
|
|
|
$
|
5,410
|
|
|
$
|
13,372
|
|
|
$
|
1,156,573
|
|
|
$
|
9,102
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
$
|
377,901
|
|
|
$
|
512
|
|
|
$
|
1,368
|
|
|
$
|
582
|
|
|
$
|
2,462
|
|
|
$
|
380,363
|
|
|
$
|
1,027
|
|
|
$
|
—
|
|
Commercial Real Estate
|
|
300,282
|
|
|
45
|
|
|
1,149
|
|
|
380
|
|
|
1,574
|
|
|
301,856
|
|
|
5,206
|
|
|
—
|
|
Acquisition & Development
|
|
99,573
|
|
|
—
|
|
|
874
|
|
|
1,243
|
|
|
2,117
|
|
|
101,690
|
|
|
2,117
|
|
|
—
|
|
Total Commercial
|
|
777,756
|
|
|
557
|
|
|
3,391
|
|
|
2,205
|
|
|
6,153
|
|
|
783,909
|
|
|
8,350
|
|
|
—
|
|
Residential
|
|
243,177
|
|
|
1,879
|
|
|
707
|
|
|
451
|
|
|
3,037
|
|
|
246,214
|
|
|
1,157
|
|
|
—
|
|
Home Equity
|
|
61,907
|
|
|
240
|
|
|
240
|
|
|
13
|
|
|
493
|
|
|
62,400
|
|
|
13
|
|
|
—
|
|
Consumer
|
|
12,634
|
|
|
11
|
|
|
—
|
|
|
138
|
|
|
149
|
|
|
12,783
|
|
|
179
|
|
|
—
|
|
Total Loans
|
|
$
|
1,095,474
|
|
|
$
|
2,687
|
|
|
$
|
4,338
|
|
|
$
|
2,807
|
|
|
$
|
9,832
|
|
|
$
|
1,105,306
|
|
|
$
|
9,699
|
|
|
$
|
—
|
|
Troubled Debt Restructurings
The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. At
March 31, 2018
and
December 31, 2017
, the Bank had specific reserve allocations for TDR’s of
$443 thousand
and
$439 thousand
, respectively.
Loans considered to be troubled debt restructured loans totaled
$6.4 million
and
$6.4 million
as of
March 31, 2018
and
December 31, 2017
, respectively. Of these totals,
$5.6 million
and
$5.9 million
, respectively, represent accruing troubled debt restructured loans and represent
38%
and
38%
, respectively of total impaired loans. Meanwhile,
$432 thousand
represents
two
loans to
one
borrower that have defaulted under the restructured terms. Both loans are commercial acquisition and development loans that were considered TDR's due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of March 31, 2018 and December 31, 2017. There were
no
previously restructured loans that defaulted during the three months ended
March 31, 2018
.
A commercial loan in the amount of
$128 thousand
was classified as impaired and as a TDR in the first quarter of 2018. This loan represents the only new TDR for the three months ended March 31, 2018. There were
no
new TDR's for the three months ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New TDR's
1
|
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
(Dollars in thousands)
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
|
Number of Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Business
|
|
1
|
|
|
$
|
128
|
|
|
$
|
128
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial Real Estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition & Development
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Commercial
|
|
1
|
|
|
128
|
|
|
128
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Home Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
1
|
|
|
$
|
128
|
|
|
$
|
128
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
1
The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.
Note 5 – Borrowed Funds
Short-term borrowings
Along with traditional deposits, the Bank has access to short-term borrowings from FHLB to fund its operations and investments. Short-term borrowings from FHLB totaled
$204.8 million
at
March 31, 2018
, compared to
$149.6 million
at
December 31, 2017
.
Information related to short-term borrowings is summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Balance at end of period
|
|
$
|
204,817
|
|
|
$
|
149,596
|
|
Average balance during the period
|
|
148,752
|
|
|
100,969
|
|
Maximum month-end balance
|
|
204,816
|
|
|
220,097
|
|
Weighted-average rate during the year
|
|
1.64
|
%
|
|
1.16
|
%
|
Weighted-average rate at end of period
|
|
1.87
|
%
|
|
1.61
|
%
|
Repurchase agreements
Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase “repurchase agreements” with customers represent funds deposited by customers, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with customers are included in borrowings section on the consolidated balance sheets. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Company and the client and are accounted for as secured borrowings. The Company's repurchase agreements reflected in liabilities consist of customer accounts and securities which are pledged on an individual security basis.
The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the amount of cash received in connection with the transaction and included in Securities sold under agreements to repurchase on the consolidated balance sheets. The primary risk with the Company's repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
All of the Company’s repurchase agreements were overnight agreements at
March 31, 2018
and
December 31, 2017
. These borrowings were collateralized with investment securities with a carrying value of
$21.3 million
and
$23.1 million
at
March 31, 2018
and
December 31, 2017
, respectively, and were comprised of U.S. Government Agencies and Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.
Repurchase agreements totaled
$20.7 million
at
March 31, 2018
, compared to
$22.4 million
in
December 31, 2017
.
Information related to repurchase agreements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Balance at end of period
|
|
$
|
20,676
|
|
|
$
|
22,403
|
|
Average balance during the period
|
|
20,605
|
|
|
25,160
|
|
Maximum month-end balance
|
|
20,676
|
|
|
25,972
|
|
Weighted-average rate during the year
|
|
0.37
|
%
|
|
0.30
|
%
|
Weighted-average rate at end of period
|
|
0.39
|
%
|
|
0.34
|
%
|
Long-term notes from the FHLB were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Fixed interest rate notes, originating between October 2006 and April 2007, due between October 2021 and April 2022, interest of between 5.18% and 5.20% payable monthly
|
|
$
|
1,784
|
|
|
$
|
1,798
|
|
Amortizing fixed interest rate note, originating February 2007, due February 2022, payable in monthly installments of $5 thousand, including interest of 5.22%
|
|
769
|
|
|
775
|
|
|
|
$
|
2,553
|
|
|
$
|
2,573
|
|
Subordinated Debt
Information related to subordinated debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Balance at end of period
|
|
$
|
33,524
|
|
|
$
|
33,524
|
|
Average balance during the period
|
|
33,524
|
|
|
33,524
|
|
Maximum month-end balance
|
|
33,524
|
|
|
33,524
|
|
Weighted-average rate during the year
|
|
6.66
|
%
|
|
6.69
|
%
|
Weighted-average rate at end of period
|
|
6.77
|
%
|
|
6.70
|
%
|
In
March 2007
, the Company completed the private placement of
$4 million
Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The proceeds from the sale of the Trust Preferred Securities will be loaned to the Company under subordinated Debentures (the “Debentures”) issued to the Trust pursuant to an Indenture. The Debentures are the only asset of the Trust. The Trust Preferred Securities have been issued to a pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s Tier 1 capital.
The Trust Preferred Securities and the Debentures mature in
2037
and have been redeemable by the Company since
2012
. Interest payments are due in
March, June, September, and December
and are adjusted at the interest due dates at a rate of
1.62%
over the three-month LIBOR Rate. The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations with respect to the trust preferred securities to the extent set forth in the related guarantees.
On
June 30, 2014
, the Company issued its Convertible Subordinated Promissory Notes Due
2024
(the “Notes”) to various investors in the aggregate principal amount of
$29,400,000
. The Notes were issued in
$100,000
increments per Note subject to a minimum investment of
$1,000,000
. The Notes expire
10 years
after the initial issuance date of the Notes (the “Maturity Date”).
Interest on the Notes accrues on the unpaid principal amount of each Note (paid quarterly in arrears on
January 1, April 1, July 1, and October 1
of each year) which rate shall be dependent upon the principal invested in the Notes and the holder’s ownership of common stock in the Company. For investments of less than
$3,000,000
in Notes, an ownership of Company common stock representing at least
30%
of the principal of the Notes acquired, the interest rate on the Notes is
7%
per annum. For investments of
$3,000,000
or greater in Notes and ownership of the Company’s common stock representing at least
30%
of the principal of the Notes acquired, the interest rate on the Notes is
7.5%
per annum. For investments of
$10,000,000
or greater, the interest rate on the Notes is
7%
per annum, regardless of whether the holder owns or acquires MVB common stock. The principal on the Notes shall be paid in full at the Maturity Date. On the fifth anniversary of the issuance of the Notes, a holder may elect to continue to receive the stated fixed rate on the Notes or a floating rate determined by LIBOR plus
5%
up to a maximum rate of
9%
, adjusted quarterly.
The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors of the Federal Reserve System, the Company may, after the Notes have been outstanding for
five years
, and without premium or penalty, prepay all or a portion of the unpaid principal amount of any Note together with the unpaid interest accrued on such portion of the principal amount of such Note. All such prepayments shall be made pro rata among the holders of all outstanding Notes.
At the election of a holder, any or all of the Notes may be converted into shares of common stock during the
30
-day period after the first, second, third, fourth, and fifth anniversaries of the issuance of the Notes or upon a notice to prepay by the Company. On December 28, 2017, the Company distributed notices to the holders of the Notes that provide that the Company has elected to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 1, 2019, which is the final conversion date for the Notes. The Notes will convert into common stock based on
$16
per share of the Company’s common stock. The conversion price will be subject to anti-dilution adjustments for certain events such as stock splits, reclassifications, non-cash distributions, extraordinary cash dividends, pro rata repurchases of common stock, and business combination transactions. The Company must give
20 days
’ notice to the holders of the Company’s intent to prepay the Notes, so that holders may execute the conversion right set forth above if a holder so desires.
Repayment of the Notes is subordinated to the Company’s outstanding senior debt including (if any) without limitation, senior secured loans. No payment will be made by the Company, directly or indirectly, on the Notes, unless and until all of the senior debt then due has been paid in full. Notwithstanding the foregoing, so long as there exists no event of default under any senior debt, the Company
would make, and a holder would receive and retain for the holder’s account, regularly scheduled payments of accrued interest and principal pursuant to the terms of the Notes.
The Company must obtain a consent of the holders of the Notes prior to issuing any new senior debt in excess of
$15,000,000
after the date of issuance of the Notes and prior to the Maturity Date.
An event of default will occur upon the Company’s bankruptcy or any failure to pay interest, principal, or other amounts owing on the Notes when due. Upon the occurrence and during the continuance of an event of default (but subject to the subordination provisions of the Notes) the holders of a majority of the outstanding principal amount of the Notes may declare all or any portion of the outstanding principal amount of the Notes due and payable and demand immediate payment of such amount.
The Notes are redeemable, in whole or in part, at a redemption price equal to
100%
of the principal amount of the Notes to be redeemed on any interest payment date after a date
five years
from the original issue date.
The Company reflects subordinated debt in the amount of
$33.5 million
and
$33.5 million
as of
March 31, 2018
and
December 31, 2017
and interest expense of
$558 thousand
and
$551 thousand
for the
three
months ended
March 31, 2018
and
2017
.
A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
204,877
|
|
2019
|
|
85
|
|
2020
|
|
90
|
|
2021
|
|
886
|
|
2022
|
|
1,431
|
|
Thereafter
|
|
33,524
|
|
|
|
$
|
240,894
|
|
Note 6 – Fair Value of Financial Instruments
Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.
Accounting standards establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by these standards are as follows:
|
|
|
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
Level II:
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
Level III:
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
The methods of determining the fair value of assets and liabilities presented in this footnote are consistent with our methodologies disclosed in Note 17, "Fair Value of Financial Instruments" and Note 18, "Fair Value Measurement" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company's
2017
Annual Report on Form 10-K, except for the valuation of loans held for investment which was impact by the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value of loans held for investment is estimated using a discounted cash flow analysis. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are considered a Level 3 classification.
Assets Measured on a Recurring Basis
As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classified investments in government securities as Level II instruments and valued them using the market approach. The following measurements are made on a recurring basis.
|
|
•
|
Available-for-sale investment securities
–
Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds, and corporate debt securities. There have been no changes in valuation techniques for the
three
months ended
March 31, 2018
. Valuation techniques are consistent with techniques used in prior periods.
|
|
|
•
|
Loans held for sale
–
The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.
|
|
|
•
|
Interest rate lock commitment
–
The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.
|
|
|
•
|
Mortgage-backed security hedges
–
MBS hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.
|
|
|
•
|
Interest rate cap
–
The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard market volatility.
|
|
|
•
|
Interest rate swap
–
Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.
|
The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of
March 31, 2018
and
December 31, 2017
by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency securities
|
|
$
|
—
|
|
|
$
|
80,795
|
|
|
$
|
—
|
|
|
$
|
80,795
|
|
U.S. Sponsored Mortgage backed securities
|
|
—
|
|
|
56,318
|
|
|
—
|
|
|
56,318
|
|
Municipal securities
|
|
—
|
|
|
57,534
|
|
|
22,571
|
|
|
80,105
|
|
Other securities
|
|
—
|
|
|
9,286
|
|
|
—
|
|
|
9,286
|
|
Equity securities
|
|
6,079
|
|
|
—
|
|
|
900
|
|
|
6,979
|
|
Loans held for sale
|
|
—
|
|
|
51,280
|
|
|
—
|
|
|
51,280
|
|
Interest rate lock commitment
|
|
—
|
|
|
—
|
|
|
2,312
|
|
|
2,312
|
|
Interest rate swap
|
|
—
|
|
|
765
|
|
|
—
|
|
|
765
|
|
Interest rate cap
|
|
—
|
|
|
103
|
|
|
—
|
|
|
103
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
—
|
|
|
765
|
|
|
—
|
|
|
765
|
|
Mortgage-backed security hedges
|
|
—
|
|
|
114
|
|
|
—
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency securities
|
|
$
|
—
|
|
|
$
|
80,945
|
|
|
$
|
—
|
|
|
$
|
80,945
|
|
U.S. Sponsored Mortgage backed securities
|
|
—
|
|
|
58,154
|
|
|
—
|
|
|
58,154
|
|
Municipal securities
|
|
—
|
|
|
52,933
|
|
|
22,909
|
|
|
75,842
|
|
Equity securities
|
|
1,607
|
|
|
14,959
|
|
|
—
|
|
|
16,566
|
|
Loans held for sale
|
|
—
|
|
|
66,794
|
|
|
—
|
|
|
66,794
|
|
Interest rate lock commitment
|
|
—
|
|
|
—
|
|
|
1,426
|
|
|
1,426
|
|
Interest rate swap
|
|
—
|
|
|
268
|
|
|
—
|
|
|
268
|
|
Interest rate cap
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
—
|
|
|
268
|
|
|
—
|
|
|
268
|
|
Mortgage-backed security hedges
|
|
—
|
|
|
78
|
|
|
—
|
|
|
78
|
|
The following table represents recurring level III assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate Lock Commitments
|
|
Municipal Securities
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
1,426
|
|
|
$
|
22,909
|
|
|
$
|
24,335
|
|
Realized and unrealized gains included in earnings
|
|
886
|
|
|
—
|
|
|
886
|
|
Unrealized loss included in other comprehensive income (loss)
|
|
—
|
|
|
(338
|
)
|
|
(338
|
)
|
Balance at March 31, 2018
|
|
$
|
2,312
|
|
|
$
|
22,571
|
|
|
$
|
24,883
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
1,546
|
|
|
$
|
6,135
|
|
|
$
|
7,681
|
|
Realized and unrealized gains included in earnings
|
|
1,309
|
|
|
—
|
|
|
1,309
|
|
Unrealized gain included in other comprehensive income (loss)
|
|
—
|
|
|
54
|
|
|
54
|
|
Balance at March 31, 2017
|
|
$
|
2,855
|
|
|
$
|
6,189
|
|
|
$
|
9,044
|
|
Assets Measured on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets, and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during
2018
and
2017
include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.
|
|
•
|
Impaired loans
–
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.
|
|
|
•
|
Other real estate owned
–
Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.
|
Assets measured at fair value on a nonrecurring basis as of
March 31, 2018
and
December 31, 2017
are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,836
|
|
|
$
|
13,836
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,910
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(Dollars in thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,368
|
|
|
$
|
14,368
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,346
|
|
|
1,346
|
|
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level III Fair Value Measurements
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
13,836
|
|
|
Appraisal of collateral
1
|
|
Appraisal adjustments
2
|
|
20% - 62%
|
|
|
|
|
|
|
|
Liquidation expense
3
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
1,910
|
|
|
Appraisal of collateral
1
|
|
Appraisal adjustments
2
|
|
20% - 30%
|
|
|
|
|
|
|
|
Liquidation expense
3
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Recurring measurements:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
22,571
|
|
|
Appraisal of bond
3
|
|
Bond appraisal adjustment
4
|
|
5% - 15%
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
2,312
|
|
|
Pricing model
|
|
Pull through rates
|
|
80% - 83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level III Fair Value Measurements
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Nonrecurring measurements:
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
14,368
|
|
|
Appraisal of collateral
1
|
|
Appraisal adjustments
2
|
|
20% - 62%
|
|
|
|
|
|
|
|
Liquidation expense
3
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
1,346
|
|
|
Appraisal of collateral
1
|
|
Appraisal adjustments
2
|
|
20% - 30%
|
|
|
|
|
|
|
|
Liquidation expense
3
|
|
5% - 10%
|
|
|
|
|
|
|
|
|
|
Recurring measurements:
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
22,909
|
|
|
Appraisal of bond
3
|
|
Bond appraisal adjustment
4
|
|
5% - 15%
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
$
|
1,426
|
|
|
Pricing model
|
|
Pull through rates
|
|
73% - 85%
|
1
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
2
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
3
Fair value determined through independent analysis of liquidity, rating, yield and duration.
4
Appraisals may be adjusted for qualitative factors such as local economic conditions.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
|
|
•
|
Cash and cash equivalents: –
The carrying amounts for cash and cash equivalents approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.
|
|
|
•
|
Certificates of deposits –
The fair values for certificates of deposits are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for certificates of deposits with similar terms of investors. No prepayments of principal are assumed.
|
|
|
•
|
Securities –
U.S. treasury, government agency, mortgage-backed securities, certain municipal securities, and corporate bonds are generally measured at fair value using a third-party pricing service or recent comparable market transactions in similar or identical securities and are classified as Level II instruments. Equity securities are measured at fair value using observable closing prices and are classified as Level I instruments if they are traded on a heavily active market and as Level II instruments if the observable closing price is from a less than active market. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments.
|
|
|
•
|
Loans held for sale –
Loans held for sale are reported at fair value. These loans currently consist of one-to-four-family residential loans originated for sale in the secondary market. Fair value is based on committed market rates or the price secondary markets are currently offering for similar loans using observable market data. (Level II)
|
|
|
•
|
Loans –
The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company's exit price or the price at which these instruments would be sold or transferred.
|
|
|
•
|
Mortgage servicing rights –
The carrying value of mortgage servicing rights approximates their fair value due to the immateriality of the balance.
|
|
|
•
|
Interest rate lock commitment –
For mortgage interest rate locks, the fair value is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis less (iii) expected costs to deliver the interest rate locks, any expected “pull through rate” is multiplied by this calculation to estimate the derivative value.
|
|
|
•
|
Mortgage-backed security hedges –
MBS hedges are used to mitigate interest rate risk for residential mortgage loans held for sale and interest rate locks and manage expected funding percentages. These instruments are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed securities.
|
|
|
•
|
Interest rate cap –
The fair value of the interest rate cap is determined at the end of each quarter by using Bloomberg Finance which values the interest rate cap using observable inputs from forward and futures yield curves as well as standard market volatility.
|
|
|
•
|
Interest rate swap –
Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.
|
|
|
•
|
Accrued interest receivable and payable and repurchase agreements –
The carrying values of accrued interest receivable and payable approximate their fair values.
|
|
|
•
|
Deposits –
The fair values of demand deposits (i.e., noninterest bearing checking, NOW and money market), savings accounts and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.
|
|
|
•
|
FHLB and other borrowings –
The fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.
|
|
|
•
|
Subordinated debt –
The fair values for debt are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for debt with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.
|
|
|
•
|
Off-balance sheet instruments –
The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.
|
The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows:
Fair Value Measurements at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level I)
|
|
Significant Other Observable Inputs (Level II)
|
|
Significant Unobservable Inputs (Level III)
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,630
|
|
|
$
|
23,630
|
|
|
$
|
23,630
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposits with other banks
|
|
14,778
|
|
|
14,695
|
|
|
—
|
|
|
14,695
|
|
|
—
|
|
Securities available-for-sale
|
|
226,504
|
|
|
226,504
|
|
|
—
|
|
|
203,933
|
|
|
22,571
|
|
Equity securities
|
|
6,979
|
|
|
6,979
|
|
|
6,079
|
|
|
—
|
|
|
900
|
|
Loans held for sale
|
|
51,280
|
|
|
51,280
|
|
|
—
|
|
|
51,280
|
|
|
—
|
|
Loans, net
|
|
1,147,106
|
|
|
1,137,716
|
|
|
—
|
|
|
—
|
|
|
1,137,716
|
|
Mortgage servicing rights
|
|
179
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
179
|
|
Interest rate lock commitment
|
|
2,312
|
|
|
2,312
|
|
|
—
|
|
|
—
|
|
|
2,312
|
|
Interest rate swap
|
|
765
|
|
|
765
|
|
|
—
|
|
|
765
|
|
|
—
|
|
Interest rate cap
|
|
103
|
|
|
103
|
|
|
—
|
|
|
103
|
|
|
—
|
|
Accrued interest receivable
|
|
5,915
|
|
|
5,915
|
|
|
—
|
|
|
1,644
|
|
|
4,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,153,907
|
|
|
$
|
1,114,189
|
|
|
$
|
—
|
|
|
$
|
1,114,189
|
|
|
$
|
—
|
|
Repurchase agreements
|
|
20,676
|
|
|
20,676
|
|
|
—
|
|
|
20,676
|
|
|
—
|
|
FHLB and other borrowings
|
|
207,370
|
|
|
207,372
|
|
|
—
|
|
|
207,372
|
|
|
—
|
|
Mortgage-backed security hedges
|
|
114
|
|
|
114
|
|
|
—
|
|
|
114
|
|
|
—
|
|
Interest rate swap
|
|
765
|
|
|
765
|
|
|
—
|
|
|
765
|
|
|
—
|
|
Accrued interest payable
|
|
908
|
|
|
908
|
|
|
—
|
|
|
908
|
|
|
—
|
|
Subordinated debt
|
|
33,524
|
|
|
35,117
|
|
|
—
|
|
|
35,117
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,305
|
|
|
$
|
20,305
|
|
|
$
|
20,305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates of deposits with other banks
|
|
14,778
|
|
|
14,985
|
|
|
—
|
|
|
14,695
|
|
|
—
|
|
Securities available-for-sale
|
|
231,507
|
|
|
231,507
|
|
|
1,607
|
|
|
206,991
|
|
|
22,909
|
|
Loans held for sale
|
|
66,794
|
|
|
66,794
|
|
|
—
|
|
|
66,794
|
|
|
—
|
|
Loans, net
|
|
1,096,063
|
|
|
1,093,824
|
|
|
—
|
|
|
—
|
|
|
1,093,824
|
|
Mortgage servicing rights
|
|
182
|
|
|
182
|
|
|
—
|
|
|
—
|
|
|
182
|
|
Interest rate lock commitment
|
|
1,426
|
|
|
1,426
|
|
|
—
|
|
|
—
|
|
|
1,426
|
|
Interest rate swap
|
|
268
|
|
|
268
|
|
|
—
|
|
|
268
|
|
|
—
|
|
Interest rate cap
|
|
33
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
Accrued interest receivable
|
|
5,296
|
|
|
5,296
|
|
|
—
|
|
|
1,241
|
|
|
4,055
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,159,580
|
|
|
$
|
1,126,615
|
|
|
$
|
—
|
|
|
$
|
1,126,615
|
|
|
$
|
—
|
|
Repurchase agreements
|
|
22,403
|
|
|
22,403
|
|
|
—
|
|
|
22,403
|
|
|
—
|
|
FHLB and other borrowings
|
|
152,169
|
|
|
152,190
|
|
|
—
|
|
|
152,190
|
|
|
—
|
|
Mortgage-backed security hedges
|
|
78
|
|
|
78
|
|
|
—
|
|
|
78
|
|
|
—
|
|
Interest rate swap
|
|
268
|
|
|
268
|
|
|
—
|
|
|
268
|
|
|
—
|
|
Accrued interest payable
|
|
643
|
|
|
643
|
|
|
—
|
|
|
643
|
|
|
—
|
|
Subordinated debt
|
|
33,524
|
|
|
35,117
|
|
|
—
|
|
|
35,117
|
|
|
—
|
|
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Note 7 – Stock Offerings
On March 13, 2017, the Company entered into an Investment Agreement (the “Investment Agreement”) with its Chief Executive Officer, Larry F. Mazza (“Mazza”). Pursuant to the Investment Agreement, Mazza committed to subscribe for and purchase, at the Subscription Price, upon expiration of the Rights Offering, the number of shares of the Company’s common stock, if any, equal to the amount by which
100,000
exceeds the number of shares purchased by Mazza in the Rights Offering. Pursuant to the Investment Agreement, Mazza agreed not to sell or otherwise transfer any shares acquired in connection with the Investment Agreement for a period of six months following the closing of the Rights Offering.
Larry F. Mazza purchased
100,000
shares of the Company's common stock:
90,999
under the rights offering and
9,001
shares under the Investment Agreement.
On March 13, 2017, the Company filed with the SEC a prospectus supplement and accompanying base prospectus (collectively, the “Prospectus”) relating to the commencement of the Company’s rights offering (the “Rights Offering”), pursuant to which the Company distributed, at no charge, non-transferable subscription rights to the holders of its common stock as of 5:00 p.m., Eastern time, on March 10, 2017. The subscription rights were exercisable for up to a total of
434,783
shares of the Company’s common stock, subject to such terms and conditions as further described in the Prospectus.
On April 20, 2017, the Company announced the completion of the rights offering, which expired at 5:00 p.m. Eastern time on April 14, 2017. All
434,783
shares offered in the rights offering were subscribed for, resulting in new capital of approximately
$5.0 million
. Computershare, who served as subscription agent, completed its review and tabulation of subscriptions on April 19, 2017. Computershare issued the shares acquired in the rights offering by book entry in the Company's stock ownership records, which are maintained by Computershare, as transfer agent, on or about April 20, 2017.
On December 5, 2016, the Company entered into Securities Purchase Agreements with certain accredited investors. Pursuant to the Purchase Agreements, the Investors agreed to purchase an aggregate of
1,913,044
shares of the Company’s common stock, par value
$1.00
per share, at a price of
$11.50
per share, as part of a private placement (the “Private Placement”). The Private Placement closed on December 6, 2016. The gross proceeds to the Company from the Private Placement were approximately
$22 million
or
$20.5 million
after stock issuance costs. The proceeds from the Private Placement were used by the Company to pay related transaction fees and expenses and for general corporate purposes. A portion of the proceeds were used for the redemption of the preferred stock issued to the United States Department of Treasury in connection with the Company’s participation in the Small Business Lending Fund.
The Purchase Agreements contain representations and warranties and covenants of the Company and the Investors that are customary in private placement transactions. The provisions of the Purchase Agreements also include an agreement by the Company to indemnify the Investors against certain liabilities.
The Purchase Agreements required the Company to file a registration statement with the SEC to register for resale the
1,913,044
shares of common stock issued to the Investors in the Private Placement. The registration statement was declared effective by the SEC on December 27, 2016.
On
June 30, 2014
, the Company filed Certificates of Designations for its Convertible Noncumulative Perpetual Preferred Stock, Series B (“Class B Preferred”) and its Convertible Noncumulative Perpetual Preferred Stock, Series C (“Class C Preferred”). The Class B Preferred Certificate designated
400
shares of preferred stock as Class B Preferred shares. The Class B Preferred shares carry an annual dividend rate of
6%
and are convertible into shares of Company common stock within
thirty days
after the first, second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of
$16
per share, as adjusted for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class B Preferred Stock regarding the Company's agreement to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion date for the Preferred Stock. The Class B Preferred shares are redeemable by the Company on or after the fifth anniversary of the original issue date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any necessary regulatory approvals. In the event of liquidation of the Company, shares of Class B Preferred stock shall be junior to creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A. Holders of Class B Preferred shares shall have no
voting rights, except for authorization of senior shares of stock, amendment to the Class B Preferred shares, share exchanges, reclassifications or changes of control, or as required by law.
The Class C Preferred Certificate designated
383.4
shares of preferred stock as Class C Preferred shares. The Class C Preferred shares carry an annual dividend rate of
6.5%
and are convertible into shares of Company common stock within
30 days
after the first, second, third, fourth and fifth anniversaries of the original issue date, based on a common stock price of
$16
per share, as adjusted for future corporate activities. On December 28, 2017, the Company distributed a notice to each of the holders of the Class C Preferred Stock regarding the Company's agreement to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 30, 2019, which is the final conversion date for the Preferred Stock. The Class C Preferred shares are redeemable by the Company on or after the fifth anniversary of the original issue date for Liquidation Amount, as defined therein, plus declared and unpaid dividends. Redemption is subject to any necessary regulatory approvals. In the event of liquidation of the Company, shares of Class C Preferred stock shall be junior to creditors of the Company and to the shares of Senior Noncumulative Perpetual Preferred Stock, Series A, and the Class B Preferred shares. Holders of Class C Preferred shares shall have no voting rights, except for authorization of senior shares of stock, amendment to the Class C Preferred shares, share exchanges, reclassifications, or changes of control, or as required by law. The proceeds of these preferred stock offerings will be used to support continued growth of the Company and its subsidiaries.
On
September 8, 2011
MVB received
$8.5 million
in Small Business Lending Fund (SBLF) capital. MVB issued
8,500
shares of
$1,000
per share preferred stock with dividends payable in arrears on
January 1, April 1, July 1, and October 1
each year. MVB's loan production qualified for the lowest dividend rate possible of
1%
. MVB may continue to utilize the SBLF capital through March 8, 2016 at the
1%
dividend rate. After that time, if the SBLF is not retired, the dividend rate increases to
9%
. On January 5, 2017, the Company redeemed all of the
8,500
shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series A, liquidation amount
$1,000
per share (“Series A Preferred Stock”). The aggregate redemption price of the Series A Preferred Stock was
$8,508,500
, including dividends accrued, but unpaid through, but not including the redemption date. The Series A Preferred Stock was redeemed from the Company’s surplus capital and approved by the Company’s primary federal regulator. The redemption terminates the Company’s participation in the SBLF program. After the redemption, the Company’s capital ratios remained well in excess of those required for well capitalized status.
Note 8 – Net Income Per Common Share
The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income less dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted average number of shares outstanding increased by both the number of shares that would be issued assuming the exercise of stock options or restricted stock unit awards under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt if dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Dollars in thousands except shares and per share data)
|
|
2018
|
|
2017
|
Numerator for basic earnings per share:
|
|
|
|
|
Net income
|
|
$
|
2,594
|
|
|
$
|
1,574
|
|
Less: Dividends on preferred stock
|
|
121
|
|
|
129
|
|
Net income available to common shareholders - basic
|
|
$
|
2,473
|
|
|
$
|
1,445
|
|
|
|
|
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
Net income available to common shareholders - basic
|
|
$
|
2,473
|
|
|
$
|
1,445
|
|
Add: Interest on subordinated debt (tax effected)
|
|
404
|
|
|
—
|
|
Net income available to common shareholders - diluted
|
|
$
|
2,877
|
|
|
$
|
1,445
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Total average shares outstanding
|
|
10,474,138
|
|
|
9,996,544
|
|
Effect of dilutive convertible subordinated debt
|
|
1,837,500
|
|
|
—
|
|
Effect of dilutive stock options and restrictive stock units
|
|
402,715
|
|
|
12,797
|
|
Total diluted average shares outstanding
|
|
12,714,353
|
|
|
10,009,341
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.24
|
|
|
$
|
0.14
|
|
Earnings per share - diluted
|
|
$
|
0.23
|
|
|
$
|
0.14
|
|
For the
three
months ended
March 31, 2018
and
2017
, approximately
490 thousand
and
2.3 million
, respectively, of options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.
For the three months ended
March 31, 2018
, approximately
3 thousand
shares of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.
Note 9 – Segment Reporting
The Company has identified
three
reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.
Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by MVB Mortgage.
Information about the reportable segments and reconciliation to the consolidated financial statements for the
three
-month periods ended
March 31, 2018
and
March 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Commercial & Retail Banking
|
|
Mortgage Banking
|
|
Financial Holding Company
|
|
Intercompany Eliminations
|
|
Consolidated
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
13,838
|
|
|
$
|
1,335
|
|
|
$
|
1
|
|
|
$
|
(120
|
)
|
|
$
|
15,054
|
|
Mortgage fee income
|
|
140
|
|
|
6,673
|
|
|
—
|
|
|
(250
|
)
|
|
6,563
|
|
Other income
|
|
1,780
|
|
|
517
|
|
|
1,553
|
|
|
(1,374
|
)
|
|
2,476
|
|
Total operating income
|
|
15,758
|
|
|
8,525
|
|
|
1,554
|
|
|
(1,744
|
)
|
|
24,093
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
2,674
|
|
|
727
|
|
|
558
|
|
|
(370
|
)
|
|
3,589
|
|
Salaries and employee benefits
|
|
3,569
|
|
|
5,416
|
|
|
1,488
|
|
|
—
|
|
|
10,473
|
|
Provision for loan losses
|
|
417
|
|
|
57
|
|
|
—
|
|
|
—
|
|
|
474
|
|
Other expense
|
|
4,559
|
|
|
2,122
|
|
|
959
|
|
|
(1,374
|
)
|
|
6,266
|
|
Total operating expenses
|
|
11,219
|
|
|
8,322
|
|
|
3,005
|
|
|
(1,744
|
)
|
|
20,802
|
|
Income (loss) before income taxes
|
|
4,539
|
|
|
203
|
|
|
(1,451
|
)
|
|
—
|
|
|
3,291
|
|
Income tax expense (benefit)
|
|
978
|
|
|
53
|
|
|
(334
|
)
|
|
—
|
|
|
697
|
|
Net income (loss)
|
|
$
|
3,561
|
|
|
$
|
150
|
|
|
$
|
(1,117
|
)
|
|
$
|
—
|
|
|
$
|
2,594
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
121
|
|
|
—
|
|
|
121
|
|
Net income (loss) available to common shareholders
|
|
3,561
|
|
|
150
|
|
|
(1,238
|
)
|
|
—
|
|
|
2,473
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for the year ended March 31, 2018
|
|
$
|
403
|
|
|
$
|
78
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
506
|
|
Total Assets as of March 31, 2018
|
|
1,581,673
|
|
|
148,789
|
|
|
185,012
|
|
|
(333,957
|
)
|
|
1,581,518
|
|
Total Assets as of December 31, 2017
|
|
1,533,497
|
|
|
149,323
|
|
|
184,600
|
|
|
(333,117
|
)
|
|
1,534,302
|
|
Goodwill as of March 31, 2018
|
|
1,598
|
|
|
16,882
|
|
|
—
|
|
|
—
|
|
|
18,480
|
|
Goodwill as of December 31, 2017
|
|
1,598
|
|
|
16,882
|
|
|
—
|
|
|
—
|
|
|
18,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Commercial & Retail Banking
|
|
Mortgage Banking
|
|
Financial Holding Company
|
|
Intercompany Eliminations
|
|
Consolidated
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,312
|
|
|
$
|
781
|
|
|
$
|
1
|
|
|
$
|
(26
|
)
|
|
$
|
13,068
|
|
Mortgage fee income
|
|
185
|
|
|
9,637
|
|
|
—
|
|
|
(188
|
)
|
|
9,634
|
|
Other income
|
|
1,077
|
|
|
(1,831
|
)
|
|
1,210
|
|
|
(1,266
|
)
|
|
(810
|
)
|
Total operating income
|
|
13,574
|
|
|
8,587
|
|
|
1,211
|
|
|
(1,480
|
)
|
|
21,892
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
2,119
|
|
|
304
|
|
|
551
|
|
|
(212
|
)
|
|
2,762
|
|
Salaries and employee benefits
|
|
2,657
|
|
|
5,955
|
|
|
1,350
|
|
|
—
|
|
|
9,962
|
|
Provision for loan losses
|
|
500
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
518
|
|
Other expense
|
|
4,650
|
|
|
2,098
|
|
|
875
|
|
|
(1,268
|
)
|
|
6,355
|
|
Total operating expenses
|
|
9,926
|
|
|
8,375
|
|
|
2,776
|
|
|
(1,480
|
)
|
|
19,597
|
|
Income (loss) before income taxes
|
|
3,648
|
|
|
212
|
|
|
(1,565
|
)
|
|
—
|
|
|
2,295
|
|
Income tax expense (benefit)
|
|
1,161
|
|
|
96
|
|
|
(536
|
)
|
|
—
|
|
|
721
|
|
Net income (loss)
|
|
$
|
2,487
|
|
|
$
|
116
|
|
|
$
|
(1,029
|
)
|
|
$
|
—
|
|
|
$
|
1,574
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
129
|
|
Net income (loss) available to common shareholders
|
|
2,487
|
|
|
116
|
|
|
(1,158
|
)
|
|
—
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures for the year ended March 31, 2017
|
|
$
|
867
|
|
|
$
|
692
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
1,588
|
|
Total Assets as of March 31, 2017
|
|
1,430,792
|
|
|
103,621
|
|
|
168,325
|
|
|
(268,787
|
)
|
|
1,433,951
|
|
Total Assets as of December 31, 2016
|
|
1,415,735
|
|
|
122,242
|
|
|
180,340
|
|
|
(299,513
|
)
|
|
1,418,804
|
|
Goodwill as of March 31, 2017
|
|
1,598
|
|
|
16,882
|
|
|
—
|
|
|
—
|
|
|
18,480
|
|
Goodwill as of December 31, 2016
|
|
1,598
|
|
|
16,882
|
|
|
—
|
|
|
—
|
|
|
18,480
|
|
Commercial & Retail Banking
For the
three months ended March 31
,
2018
, the Commercial & Retail Banking segment earned
$3.6 million
compared to
$2.5 million
in
2017
. Net interest income increased by
$971 thousand
, primarily the result of an increase of
$949 thousand
in interest and fees on loans, an increase of
$349 thousand
in interest on taxable investment securities, and an increase
$217 thousand
in tax exempt loans and securities. These increases in interest income were offset by the following: an increase of
$392 thousand
in interest on deposits and an increase of
$160 thousand
in interest on FHLB and other borrowings due to an increase in short-term borrowing rates. Noninterest income increased by
$658 thousand
which was the result of an increase of
$413 thousand
in commercial swap fee income, an improvement of
$183 thousand
in the performance of the interest rate cap, and an increase of
$203 thousand
in gain on sale of portfolio loans. Noninterest expense increased by
$821 thousand
, primarily the result of the following: an increase of
$912 thousand
in salaries and employee benefits expense and an incre
ase of
$202 thousand
in other operating expenses. These increases were partially offset by a decrease of
$376 thousand
in data processing and communications expense. In addition, provision expense decreased by
$83 thousand
due to significantly reduced historical loan loss rates, which more than offset the level of provision needed by the increased loan volume in the first quarter of 2018 versus the same quarter in 2017, and a higher level of charge-offs in the first quarter of 2018 versus 2017.
Mortgage Banking
For the
three months ended March 31
,
2018
, the Mortgage Banking segment earned
$150 thousand
compared to
$116 thousand
in
2017
. Net interest income increased
$131 thousand
, which was the result of an increase of
$554 thousand
in interest and fees on loans, offset by an increase of
$423 thousand
in interest on FHLB and other borrowings due to an increase in short-term borrowing rates. Noninterest income decreased by
$616 thousand
, primarily the result of a decrease of
$3.0 million
in mortgage fee income, partially offset by an increase of
$2.3 million
in the gain on derivative. The increase in gain on derivatives was largely the result of a
67.6%
increase in the locked mortgage pipeline for the
three months ended March 31
,
2018
compared to a
12.8%
increase in the locked mortgage pipeline for the
three months ended March 31
,
2017
. Noninterest expense decreased by
$515 thousand
, which was the result of a decrease of
$539 thousand
in salaries and employee benefits expense
. The decrease in salaries and employee benefits expense was primarily the result of lower commissions paid due t
o a
13.2%
decrease in mortgage closed loan volume and a decrease of
$125 thousand
in the earn out paid to management of the mortgage company related to the 2012 acquisition.
Financial Holding Company
For the
three months ended March 31
,
2018
, the Financial Holding Company segment lost
$1.1 million
compared to a loss of
$1.0 million
in
2017
. Interest expense increased
$7 thousand
, noninterest income increased
$343 thousand
, and n
oninterest expense increased
$222 thousand
. In addition, the income tax benefit decreased
$202 thousand
. The increase in noninterest income was primarily the result of a
$186 thousand
gain on sale of securities, a
$52 thousand
holding gain on equity securities, and a
$105 thousand
increase in intercompany services income related to Regulation W. The increase in noninterest expense was primarily
the result of a
$138 thousand
increase in salaries and employee benefits expense and an increase of
$131 thousand
in travel, entertainment, dues, and subscriptions.
Note 10 – Pension and Supplemental Executive Retirement Plans
The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees. Benefits are based on years of service and the employee's compensation. Accruals under the Plan were frozen as of
May 31, 2014
. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on
May 31, 2014
of
4.46%
.
Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of
March 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
88
|
|
|
90
|
|
Expected Return on Plan Assets
|
|
(93
|
)
|
|
(86
|
)
|
Amortization of Net Actuarial Loss
|
|
77
|
|
|
60
|
|
Amortization of Prior Service Cost
|
|
—
|
|
|
—
|
|
Net Periodic Benefit Cost
|
|
$
|
72
|
|
|
$
|
64
|
|
Contributions Paid
|
|
$
|
79
|
|
|
$
|
58
|
|
On June 19, 2017, the Company and MVB Mortgage approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief Executive Officer of MVB Mortgage is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017.
If executive completes three years of continuous employment with MVB Mortgage prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive
$1.8 million
payable in
180
equal consecutive installments of
$10 thousand
. The liability is calculated by discounting the anticipated future cash flows at
4.0%
. The liability accrued for this obligation was
$95 thousand
and
$1 thousand
as of
March 31, 2018
and
December 31, 2017
, respectively. Service cost was
$94 thousand
for the three months ended
March 31, 2018
.
Note 11 – Comprehensive Income
The following tables present the components of accumulated other comprehensive income (“AOCI”)
three months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
|
|
Details about AOCI Components
|
|
Amount Reclassified from AOCI
|
|
Amount Reclassified from AOCI
|
|
Affected line item in the Statement where Net Income is presented
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
$
|
326
|
|
|
$
|
183
|
|
|
Gain on sale of securities
|
|
|
326
|
|
|
183
|
|
|
Total before tax
|
|
|
(88
|
)
|
|
(73
|
)
|
|
Income tax expense
|
|
|
238
|
|
|
110
|
|
|
Net of tax
|
Defined benefit pension plan items
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
(77
|
)
|
|
(60
|
)
|
|
Salaries and benefits
|
|
|
(77
|
)
|
|
(60
|
)
|
|
Total before tax
|
|
|
31
|
|
|
24
|
|
|
Income tax expense
|
|
|
(46
|
)
|
|
(36
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications
|
|
$
|
192
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Unrealized gains (losses) on available for-sale securities
|
|
Defined benefit pension plan items
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
(5
|
)
|
|
$
|
(2,983
|
)
|
|
$
|
(2,988
|
)
|
Other comprehensive loss before reclassification
|
|
(3,247
|
)
|
|
(46
|
)
|
|
(3,293
|
)
|
Amounts reclassified from AOCI
|
|
(238
|
)
|
|
46
|
|
|
(192
|
)
|
Net current period OCI
|
|
(3,485
|
)
|
|
—
|
|
|
(3,485
|
)
|
Stranded AOCI
|
|
—
|
|
|
(646
|
)
|
|
(646
|
)
|
Mark to Market on equity positions held at December 31, 2017
|
|
(98
|
)
|
|
—
|
|
|
(98
|
)
|
Balance at March 31, 2018
|
|
$
|
(3,588
|
)
|
|
$
|
(3,629
|
)
|
|
$
|
(7,217
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
(1,598
|
)
|
|
$
|
(2,679
|
)
|
|
$
|
(4,277
|
)
|
Other comprehensive loss before reclassification
|
|
269
|
|
|
62
|
|
|
331
|
|
Amounts reclassified from AOCI
|
|
(110
|
)
|
|
36
|
|
|
(74
|
)
|
Net current period OCI
|
|
159
|
|
|
98
|
|
|
257
|
|
Balance at March 31, 2017
|
|
$
|
(1,439
|
)
|
|
$
|
(2,581
|
)
|
|
$
|
(4,020
|
)
|