Companies: 10,762     total market cap: $132.638 T
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MVB Financial
MVBF
#7861
Rank
$0.31 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$24.83
Share price
-1.12%
Change (1 day)
45.63%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. MVB Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

MVB Financial - 10-Q quarterly report FY2020 Q2


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
☐ TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 000-50567
mvbf-20200630_g1.jpg
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
West Virginia20-0034461
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
301 Virginia Avenue, Fairmont, WV
26554
(Address of principal executive offices)(Zip Code)
(304) 363-4800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.00 par valueMVBFThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

As of August 5, 2020, the Registrant had 11,964,925 shares of common stock outstanding with a par value of $1.00 per share.


TABLE OF CONTENTS

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2

PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
June 30, 2020December 31, 2019
(Unaudited)(Note 1)
ASSETS
Cash and cash equivalents:
     Cash and due from banks$28,636  $18,430  
     Interest bearing balances with banks50,218  9,572  
     Total cash and cash equivalents78,854  28,002  
Certificates of deposit with other banks13,046  12,549  
Investment securities available-for-sale, at fair value220,699  235,821  
Equity securities19,464  18,514  
Loans held for sale242,089  109,788  
Loans:1,494,672  1,374,541  
     Less: Allowance for loan losses(17,742) (11,775) 
     Net Loans1,476,930  1,362,766  
Premises and equipment, net24,586  21,974  
Bank owned life insurance35,818  35,374  
Accrued interest receivable and other assets84,439  53,142  
Assets of branches held for sale (See Note 1)—  46,554  
Goodwill19,232  19,630  
TOTAL ASSETS$2,215,157  $1,944,114  
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Deposits: 
     Noninterest bearing$528,527  $278,547  
     Interest bearing1,335,436  986,495  
     Total deposits1,863,963  1,265,042  
Deposits of branches held for sale (See Note 1)—  188,270  
Accrued interest payable and other liabilities72,145  41,685  
Repurchase agreements9,815  10,172  
FHLB and other borrowings36,610  222,885  
Subordinated debt4,124  4,124  
     Total liabilities1,986,657  1,732,178  
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1,000; 20,000 authorized; 733 issued in 2020 and 2019, respectively7,334  7,334  
Common stock, par value $1; 20,000,000 shares authorized; 12,065,627 shares issued and 11,968,425 shares outstanding in 2020 and 11,995,366 shares issued and 11,944,289 shares outstanding in 201912,066  11,995  
Additional paid-in capital123,848  122,516  
Retained earnings89,197  72,496  
Accumulated other comprehensive loss(2,193) (1,321) 
Treasury stock, 97,202 shares in 2020 and 51,077 shares in 2019, at cost(1,752) (1,084) 
     Total stockholders’ equity228,500  211,936  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,215,157  $1,944,114  

See accompanying notes to unaudited consolidated financial statements.
3

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
Six Months Ended June 30Three Months Ended June 30
2020201920202019
INTEREST INCOME
     Interest and fees on loans$39,088  $36,231  $20,149  $18,569  
     Interest on deposits with other banks191  247  80  125  
     Interest on investment securities - taxable1,143  1,647  477  768  
     Interest on tax exempt loans and securities2,051  1,968  1,068  1,008  
     Total interest income42,473  40,093  21,774  20,470  
INTEREST EXPENSE
     Interest on deposits6,946  8,671  3,036  4,548  
     Interest on repurchase agreements15  25  5  11  
     Interest on FHLB and other borrowings825  2,324  252  1,095  
     Interest on subordinated debt58  572  23  287  
     Total interest expense7,844  11,592  3,316  5,941  
NET INTEREST INCOME34,629  28,501  18,458  14,529  
     Provision for loan losses7,734  900  6,596  600  
     Net interest income after provision for loan losses26,895  27,601  11,862  13,929  
NONINTEREST INCOME
     Service charges on deposit accounts736  648  286  333  
     Income on bank owned life insurance444  749  221  224  
     Interchange and debit card transaction fees342  322  242  181  
     Mortgage fee income26,163  16,534  14,944  9,864  
     Gain on sale of portfolio loans130  178  —  123  
     Insurance and investment services income396  323  189  167  
     Gain (loss) on sale of available-for-sale securities, net830  (168) 554  (50) 
     Gain (loss) on sale of equity securities, net30  (7) 30  (7) 
     Gain on derivatives, net9,873  1,581  13,435  1,131  
     Commercial swap fee income340  518  20  438  
     Holding gain on equity securities17  13,767  3  13,587  
     Compliance consulting income1,950  —  941  —  
     Bargain purchase gain4,671  —  4,671  —  
     Gain on sale of banking centers9,631  —  9,631  —  
     Other operating income810  707  346  396  
     Total noninterest income56,363  35,152  45,513  26,387  
NONINTEREST EXPENSES
     Salary and employee benefits38,841  25,014  22,659  13,280  
     Occupancy expense2,407  2,351  1,187  1,166  
     Equipment depreciation and maintenance1,791  1,758  914  904  
     Data processing and communications2,896  1,957  1,733  969  
     Mortgage processing1,741  1,525  890  716  
     Marketing, contributions, and sponsorships664  508  328  294  
     Professional fees4,325  1,709  2,994  881  
     Printing, postage, and supplies380  307  203  172  
     Insurance, tax, and assessment expense1,030  992  566  487  
     Travel, entertainment, dues, and subscriptions2,059  1,594  841  904  
     Other operating expenses1,855  1,123  1,018  617  
     Total noninterest expense57,989  38,838  33,333  20,390  
Income from continuing operations, before income taxes25,269  23,915  24,042  19,926  
Income tax expense - continuing operations6,187  5,792  6,008  4,995  
Net income from continuing operations$19,082  $18,123  18,034  14,931  
Income from discontinued operations, before income taxes$—  $600  —  600  
Income tax expense - discontinued operations$—  $154  —  154  
Net income from discontinued operations$—  $446  —  446  
Net income19,082  18,569  18,034  15,377  
Preferred dividends229  243  $115  $122  
Net income available to common shareholders$18,853  $18,326  17,919  15,255  
4

Earnings per share from continuing operations - basic$1.58  $1.54  $1.50  $1.27  
Earnings per share from discontinued operations - basic$—  $0.04  $—  $0.04  
Earnings per share - basic$1.58  $1.58  $1.50  $1.31  
Earnings per share from continuing operations - diluted$1.55  $1.41  $1.49  $1.15  
Earnings per share from discontinued operations - diluted$—  $0.03  $—  $0.03  
Earnings per share - diluted$1.55  $1.44  $1.49  $1.18  
Weighted average shares outstanding - basic11,948,790  11,625,903  11,954,813  11,644,061  
Weighted average shares outstanding - diluted12,156,214  13,139,612  12,011,845  13,155,302  
See accompanying notes to unaudited consolidated financial statements.
5

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Six Months Ended June 30Three Months Ended June 30
2020201920202019
Net Income$19,082  $18,569  $18,034  $15,377  
Other comprehensive (loss) income:
Unrealized holding gains on securities available-for-sale1,965  6,550  551  4,691  
Income tax effect(531) (1,769) (149) (1,267) 
Reclassification adjustment for (gain) loss recognized in income(830) 168  (554) 50  
Income tax effect225  (45) 150  (13) 
Change in defined benefit pension plan(1,707) (847) (1,001) (518) 
Income tax effect461  228  270  140  
Reclassification adjustment for amortization of net actuarial loss recognized in income 210  135  105  68  
Income tax effect(57) (36) (28) (18) 
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income(833) (126) 960  332  
Income tax effect225  34  (259) (90) 
Total other comprehensive (loss) income(872) 4,292  45  3,375  
Comprehensive income$18,210  $22,861  $18,079  $18,752  

See accompanying notes to unaudited consolidated financial statements.

6

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) (Dollars in thousands except per share data)
 Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTreasury StockTotal Stockholders' Equity
Balance at December 31, 20187,834  11,658  116,897  48,274  (6,806) (1,084) 176,773  
Net Income—  —  —  3,192  —  —  3,192  
Other comprehensive income—  —  —  —  917  —  917  
Cash dividends paid ($0.035 per common share)—  —  —  (408) —  —  (408) 
Dividends on preferred stock—  —  —  (121) —  —  (121) 
Stock based compensation—  —  425  —  —  —  425  
Common stock options exercised—  8  86  —  —  —  94  
Balance at March 31, 2019$7,834  $11,666  $117,408  $50,937  $(5,889) $(1,084) $180,872  
Net Income—  —  —  15,377  —  —  15,377  
Other comprehensive income—  —  —  —  3,375  —  3,375  
Cash dividends paid ($0.04 per common share)—  —  —  (464) —  —  (464) 
Dividends on preferred stock—  —  —  (122) —  —  (122) 
Stock based compensation—  —  401  —  —  —  401  
Common stock options exercised—  26  211  —  —  —  237  
Restricted stock units vested—  10  (10) —  —  —  —  
Common stock issued from subordinated debt conversion, net of costs—  62  938  —  —  —  1,000  
Balance at June 30, 2019$7,834  $11,764  $118,948  $65,728  $(2,514) $(1,084) $200,676  
Balance at December 31, 2019$7,334  $11,995  $122,516  $72,496  $(1,321) $(1,084) $211,936  
Net Income—  —  —  1,048  —  —  1,048  
Other comprehensive loss—  —  —  —  (917) —  (917) 
Cash dividends paid ($0.09 per common share)—  —  —  (1,076) —  —  (1,076) 
Dividends on preferred stock—  —  —  (114) —  —  (114) 
Stock based compensation—  —  498  —  —  —  498  
Common stock options exercised—  3  35  —  —  —  38  
Common stock repurchased—  —  —  —  —  (260) (260) 
Balance at March 31, 2020$7,334  $11,998  $123,049  $72,354  $(2,238) $(1,344) $211,153  
Net Income—  —  —  18,034  —  —  18,034  
Other comprehensive income—  —  —  —  45  —  45  
Cash dividends paid ($0.09 per common share)—  —  —  (1,076) —  —  (1,076) 
Dividends on preferred stock—  —  —  (115) —  —  (115) 
Stock based compensation—  —  627  —  —  —  627  
Restricted stock units vested—  49  (49) —  —  (7) (7) 
Common stock issued related to Paladin acquisition—  19  221  —  —  —  240  
Common stock repurchased—  —  —  —  —  (401) (401) 
Balance at June 30, 2020$7,334  $12,066  $123,848  $89,197  $(2,193) $(1,752) $228,500  
See accompanying notes to unaudited consolidated financial statements.
7

MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Six Months Ended June 30,
20202019
OPERATING ACTIVITIES
Net Income$19,082  $18,569  
Adjustments to reconcile net income to net cash used in operating activities:
     Net amortization and accretion of investments638  568  
     Net amortization of deferred loan costs381  178  
     Provision for loan losses7,734  900  
     Depreciation and amortization1,708  1,525  
     Stock based compensation1,125  826  
     Loans originated for sale(1,334,910) (641,406) 
     Proceeds of loans sold1,228,772  613,841  
     Mortgage fee income(26,163) (16,534) 
     Gain on sale of available-for-sale securities(830) (80) 
     Loss on sale of available-for-sale securities—  248  
     Gain on sale of equity securities(30) (2) 
     Loss on sale of equity securities—  9  
     Gain on sale of portfolio loans(130) (178) 
     Income on bank owned life insurance(444) (749) 
     Deferred taxes1,280  (4,188) 
     Amortization of operating lease right-of-use asset15  39  
     Holding gain on equity securities(17) (13,767) 
     Bargain purchase gain(4,671) —  
     Gain on sale of banking centers(9,631) —  
     Changes in other assets(32,467) (12,867) 
     Changes in other liabilities27,841  23,208  
     Net cash used in operating activities(120,717) (29,860) 
INVESTING ACTIVITIES
     Purchases of investment securities available-for-sale(51,201) (35,528) 
     Maturities/paydowns of investment securities available-for-sale37,637  21,522  
     Sales of investment securities available-for-sale41,160  26,616  
     Purchases of premises & equipment(2,519) (629) 
     Net increase in loans(55,365) (22,987) 
     Purchases of restricted bank stock(18,615) (18,568) 
     Redemptions of restricted bank stock27,982  17,757  
     Proceeds from sale of certificates of deposit with banks—  248  
     Purchases of certificates of deposit with banks(497) —  
     Proceeds from sale of other real estate owned4,440  695  
     Proceeds from death benefit of bank owned life insurance policies—  688  
     Purchase of equity securities(1,260) (1,250) 
     Sales of equity securities357  5,968  
     Net cash paid for branch divestiture(136,005) —  
     Net cash provided by business combinations64,633  —  
     Net cash used in investing activities(89,253) (5,468) 
FINANCING ACTIVITIES
     Net increase in deposits456,265  68,583  
     Net decrease in repurchase agreements(357) (5,496) 
     Net change in FHLB & other borrowings(192,075) (27,987) 
     Common stock options exercised38  331  
     Common stock repurchased(668) —  
     Cash dividends paid on common stock(2,152) (872) 
     Cash dividends paid on preferred stock(229) (243) 
     Net cash provided by financing activities260,822  34,316  
Increase (decrease) in cash and cash equivalents50,852  (1,012) 
Cash and cash equivalents at beginning of period28,002  22,221  
Cash and cash equivalents at end of period$78,854  $21,209  
8

Business combination non-cash disclosures:
     Assets acquired in business combination (net of cash received)$87,722  $—  
     Liabilities assumed in business combination148,731  —  
Supplemental disclosure of cash flow information:
     Loans transferred to other real estate owned$23  $79  
     Cashless stock options exercised35  —  
     Restricted stock units vested49  10  
     Common stock issued related to Paladin acquisition240  —  
     Common stock converted from subordinated debt—  1,000  
     Initial recognition of operating lease right-of-use assets—  12,935  
     Initial recognition of operating lease liabilities—  15,659  
Cash payments for:
     Interest on deposits, repurchase agreements and borrowings10,264  12,600  
     Income taxes1,455  1,096  
See accompanying notes to unaudited consolidated financial statements.
9

Notes to the Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly owned subsidiary, MVB Bank, Inc. (“MVB Bank” or the “Bank”). MVB Bank’s subsidiaries include Potomac Mortgage Group (“PMG” which began doing business under the registered trade name “MVB Mortgage”), MVB Insurance, LLC (“MVB Insurance”), MVB Community Development Corporation (“MVB CDC”), ProCo Global, Inc. (“ProCo” which began doing business under the registered trade name Chartwell Compliance “Chartwell”), and Paladin Fraud, LLC (“Paladin”).

Principles of Consolidation and Basis of Presentation

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of December 31, 2019 has been derived from audited financial statements included in the Company’s 2019 filing on Form 10-K. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s December 31, 2019, Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.

Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.

Business Combinations

GAAP requires that the acquisition method of accounting, formerly referred to as the purchase method, be used for all business combinations that an acquirer be identified for each business combination. Under GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity at the acquisition date.

Assets and Liabilities of Branches Held for Sale

On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the Purchase Agreement, Summit agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, personal property, and other fixed assets associated with the branch locations. The Company closed this transaction on April 24, 2020, and as such, no assets or liabilities of branches are classified as held for sale as of June 30, 2020. The Company recognized a gain on sale of banking centers of $9.6 million.

10

Assets to be acquired and liabilities to be assumed are summarized as follows:
(Dollars in thousands)As of December 31, 2019,
Loans$42,916  
Premises and equipment, net3,638  
Assets of branches held for sale$46,554  
Noninterest-bearing deposits$19,251  
Interest-bearing deposits169,019  
Deposits of branches held for sale$188,270  

Coronavirus Disease (“COVID-19”) Pandemic

The consolidated financial statements contained in this Quarterly Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of June 30, 2020. During 2020, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures, and the reluctance of individuals to leave their homes as a result of the outbreak of COVID-19. The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially impact the Company’s clients, providers, and third parties. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The CARES Act also established the Paycheck Protection Program (“PPP”), to be administered by the U.S. Small Business Administration (“SBA”), whereby certain small businesses are eligible for a loan with an interest rate of 1% to fund payroll expenses, rent, and related costs. The PPP loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company is actively participating with the PPP, evaluating other programs available to assist our clients, and providing consumer deferrals consistent with government-sponsored enterprise (“GSE”) guidelines. The Company originated 455 PPP loans with balances of $89.8 million as of June 30, 2020. For more information on the PPP loans, see Note 4, “Loans and Allowance for Loan Losses” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Purchased Credit Impaired Loans

Through the FDIC-assisted acquisition of The First State Bank (“First State”), the Company purchased individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (non-accretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

11

Note 2 – Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-20 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; 4) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and 6) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: 1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include additions, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements, and 4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company adopted this standard and there was no material impact.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, and in November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification and corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be
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collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance was initially effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company has formed an implementation team led by the CFO, that also includes other lines of business and functions within the Company. The Company has also engaged a third party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist in the development of models that can meet the requirements of the new guidance. While this standard may potentially have a material impact on the Company’s consolidated financial statements, we are still in the process of completing our evaluation. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments – Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable.

Note 3 – Investment Securities

There were no held-to-maturity securities at June 30, 2020 or December 31, 2019.

Amortized cost and fair values of investment securities available-for-sale at June 30, 2020 are summarized as follows:
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
U. S. Agency securities$41,417  $833  $(270) $41,980  
U.S. Sponsored Mortgage-backed securities33,753  573  (52) 34,274  
Municipal securities126,203  4,110  (108) 130,205  
Total debt securities201,373  5,516  (430) 206,459  
Other securities14,161  182  (103) 14,240  
Total investment securities available-for-sale$215,534  5,698  $(533) $220,699  

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

The following table summarizes amortized cost and fair values of available-for-sale debt securities by contractual maturity:
June 30, 2020
(Dollars in thousands)Amortized CostFair Value
Within one year$90  $90  
After one year, but within five8,527  8,907  
After five years, but within ten22,148  22,946  
After ten years170,608  174,516  
Total$201,373  $206,459  

Investment securities with a carrying value of $119.5 million at June 30, 2020, were pledged to secure public funds, repurchase agreements, and potential borrowings at the Federal Reserve discount window.

The Company’s investment portfolio includes securities that are in an unrealized loss position as of June 30, 2020, the details of which are included in the following table. Although these securities, if sold at June 30, 2020 would result in a pretax loss of $533 thousand, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the
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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 June 30, 2020, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current temporary decline in fair value.

The following table discloses investments in an unrealized loss position at June 30, 2020:
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. Agency securities (22)$4,652  $(74) $13,452  $(196) 
U.S. Sponsored Mortgage-backed securities (9)2,625  (18) 3,174  (34) 
Municipal securities (9)6,134  (108) —  —  
Other securities (5)4,416  (103) —  —  
$17,827  $(303) $16,626  $(230) 

The following table discloses investments in an unrealized loss position at December 31, 2019:
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. Agency securities (26)$8,160  $(59) $15,399  $(190) 
U.S. Sponsored Mortgage-backed securities (40)16,660  (170) 27,498  (454) 
Municipal securities (13)6,018  (40) 828  (17) 
Other securities (2)1,093  (7) —  —  
$31,931  $(276) $43,725  $(661) 

For the three-month periods ended June 30, 2020 and 2019, the Company sold investments available-for-sale of $30.9 million and $12.9 million, respectively. These sales resulted in gross gains of $554 thousand and $47 thousand and gross losses of $0 and $97 thousand, respectively.

For the six-month periods ended June 30, 2020 and 2019, the Company sold investments available-for-sale of $41.2 million and $26.6 million, respectively. These sales resulted in gross gains of $830 thousand and $80 thousand and gross losses of $0 and $248 thousand, respectively.

For the three-month periods ended June 30, 2020 and 2019, the Company sold equity investments totaling $357 thousand and $6.0 million. These sales resulted in gross gains of $30 thousand and $0 and gross losses of $0 and $7 thousand, respectively.

For the six-month periods ended June 30, 2020 and 2019, the Company sold equity investments totaling $357 thousand and $6.0 million, respectively. These sales resulted in gross gains of $30 thousand and $2 thousand and gross losses of $0 and $9 thousand, respectively.

For the three-month periods ended June 30, 2020 and 2019, the Company recognized unrealized holding gains on equity securities of $3 thousand and $13.6 million, respectively. For the six-month periods ended June 30, 2020 and 2019, the Company recognized unrealized holding gains on equity securities of $17 thousand and $13.8 million, respectively. These were recorded in noninterest income in the consolidated statements of income.

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Note 4 – Loans and Allowance for Loan Losses

The components of loans in the Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, were as follows:
(Dollars in thousands)June 30, 2020December 31, 2019
Commercial and Non-Residential Real Estate$1,127,792  $1,063,828  
Residential Real Estate279,626  271,604  
Home Equity37,383  35,106  
Consumer3,525  3,697  
Purchased credit impaired loans:
Commercial and Non-Residential Real Estate19,799  —  
Residential Real Estate27,033  —  
Home Equity—  —  
Consumer1,603  —  
Total Loans$1,496,761  $1,374,235  
Deferred loan origination (fees) and costs, net(2,089) 306  
Loans receivable$1,494,672  $1,374,541  

Performing loans acquired as a result of the FDIC-assisted acquisition of First State are included with the Company's legacy loan portfolio within this Note. The purchased credit impaired loans acquired from First State are discussed in a separate section, Purchased Credit Impaired Loans, at the end of this Note and are not included, unless otherwise indicated.

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

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

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, excluding the performing loans and purchased credit impaired loans acquired from First State, were $2.1 million and $2.0 million, while the related reserves were $69 thousand and $139 thousand as of June 30, 2020 and December 31, 2019. Such collectively evaluated impaired loans are included in total loans individually evaluated for impairment and in total impaired loans.

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

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

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.
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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 June 30, 2020 and December 31, 2019, the liability for unfunded commitments related to loans held for investment, excluding loans acquired from First State, was $332 thousand.

Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The ALL is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the 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 June 30, 2020:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
December 31, 2019$10,098  $1,272  $327  $78  $11,775  
     Charge-offs(1,756) —  (23) —  (1,779) 
     Recoveries6  —  4  2  12  
     Provision 7,053  574  (44) (22) 7,561  
ALL balance at June 30, 2020$15,401  $1,846  $264  $58  $17,569  
Individually evaluated for impairment$1,547  $—  $—  $—  $1,547  
Collectively evaluated for impairment$13,854  $1,846  $264  $58  $16,022  

(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at March 31, 2020$9,597  $1,272  $236  $56  $11,161  
     Charge-offs—  —  (23) —  (23) 
     Recoveries6  —  2  —  8  
     Provision 5,798  574  49  2  6,423  
ALL balance at June 30, 2020$15,401  $1,846  $264  $58  $17,569  
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The following table summarizes the primary segments of the Company's loan portfolio as of June 30, 2020:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$14,372  $3,082  $102  $—  $17,556  
     Collectively evaluated for impairment1,113,420  276,544  37,281  3,525  1,430,770  
Total Loans1,127,792  279,626  37,383  3,525  1,448,326  

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 June 30, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
December 31, 2018$8,605  $1,405  $684  $245  $10,939  
     Charge-offs(666) —  —  (10) (676) 
     Recoveries1  1  2  1  5  
     Provision 1,031  (177) 26  20  900  
ALL balance at June 30, 2019$8,971  $1,229  $712  $256  $11,168  
Individually evaluated for impairment$534  $—  $—  $—  $534  
Collectively evaluated for impairment$8,437  $1,229  $712  $256  $10,634  

(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at March 31, 2019$8,864  $1,417  $704  $257  $11,242  
     Charge-offs(666) —  —  (10) (676) 
     Recoveries1  —  1  —  2  
     Provision (recovery)772  (188) 7  9  600  
ALL balance at June 30, 2019$8,971  $1,229  $712  $256  $11,168  

The following table summarizes the primary segments of the Company's loan portfolio as of June 30, 2019:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$7,771  $3,112  $250  $37  $11,170  
     Collectively evaluated for impairment977,059  270,715  58,643  8,812  1,315,229  
Total Loans$984,830  $273,827  $58,893  $8,849  $1,326,399  

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.

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

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

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

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

Commercial SBA Paycheck Protection Program loans –This segment includes the loan originated through the recently created Small Business Administration’s Paycheck Protection Program loans. Credit risk is heightened as this SBA program mandates that these loans require no collateral and no guarantors of the loans. However, the loans are backed by a full guaranty of the SBA, so long as the loans were originated in accordance with the program guidelines. Additionally, these loans are eligible for full forgiveness by the SBA so long as the borrowers comply with the program guidelines as it pertains to their eligibility to borrow these funds, as well as their use of the funds.

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

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

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

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The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2020 and December 31, 2019:
 Impaired Loans with Specific AllowanceImpaired Loans with No Specific AllowanceTotal Impaired Loans
(Dollars in thousands)Recorded InvestmentRelated AllowanceRecorded InvestmentRecorded InvestmentUnpaid Principal Balance
June 30, 2020
Commercial
     Commercial Business$8,637  $1,068  $661  $9,298  $10,499  
     Commercial Real Estate2,100  479  992  3,092  3,198  
     Acquisition & Development—  —  2,035  2,035  3,435  
     SBA Paycheck Protection Program—  —  —  —  —  
          Total Commercial10,737  1,547  3,688  14,425  17,132  
Residential—  —  3,212  3,212  3,372  
Home Equity—  —  111  111  137  
Consumer—  —  —  —  —  
          Total Impaired Loans$10,737  $1,547  $7,011  $17,748  $20,641  
December 31, 2019
Commercial
     Commercial Business$2,606  $249  $644  $3,250  $4,308  
     Commercial Real Estate1,786  325  295  2,081  2,171  
     Acquisition & Development—  —  2,070  2,070  3,467  
     SBA Paycheck Protection Program—  —  —  —  —  
          Total Commercial4,392  574  3,009  7,401  9,946  
Residential—  —  1,953  1,953  2,045  
Home Equity—  —  95  95  100  
Consumer—  —  34  34  35  
          Total Impaired Loans$4,392  $574  $5,091  $9,483  $12,126  

Excluding loans acquired from First State, impaired loans have increased by $8.1 million, or 85.1%, during the six months ended June 30, 2020. This change is the net effect of multiple factors, including the identification of $8.2 million of impaired loans, curtailments of $348 thousand, the foreclosure of one consumer loan which required the reclassification of $23 thousand to other real estate owned, the reclassification of $26 thousand to performing loans based on improved repayment performance, and normal loan amortization of $295 thousand.

The $8.2 million of loans recently classified as impaired are primarily concentrated in a single commercial loan relationship that includes three loans for a total of $6.1 million, or 74.4% of the total of recently impaired loans. The remaining $2.1 million represents two unrelated commercial loans totaling $718 thousand, four unrelated mortgage loans totaling $1.4 million, and a single home equity line of credit in the amount of $34 thousand.

Impaired loans acquired from First State, excluding purchased credit impaired loans, totaled $192 thousand as of June 30, 2020.

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The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
Six Months Ended June 30, 2020Three Months Ended June 30, 2020
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash BasisAverage Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$3,972  $1  $—  $4,681  $1  $—  
  Commercial Real Estate3,054  52  52  3,211  26  29  
  Acquisition & Development2,043  57  19  2,038  29  —  
  SBA Paycheck Protection Program—  —  —  —  —  —  
    Total Commercial9,069  110  71  9,930  56  29  
Residential2,547  11  9  2,712  6  4  
Home Equity110  —  —  120  —  —  
Consumer10  —  —  —  —  —  
Total$11,736  $121  $80  $12,762  $62  $33  

Six Months Ended June 30, 2019Three Months Ended June 30, 2019
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash BasisAverage Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial Business$3,516  $—  $—  $3,424  $—  $—  
  Commercial Real Estate3,809  81  83  3,579  40  45  
  Acquisition & Development2,194  61  60  2,173  31  31  
  SBA Paycheck Protection Program—  —  —  —  —  —  
    Total Commercial9,519  142  143  9,176  71  76  
Residential2,990  7  7  3,123  3  4  
Home Equity166  1  1  210  1  1  
Consumer51  —  —  23  —  —  
Total$12,726  $150  $151  $12,532  $75  $81  

As of June 30, 2020, the Bank’s other real estate owned balance totaled $1.2 million, excluding other real estate owned acquired from First State. The Bank held three foreclosed residential real estate properties representing $357 thousand, or 30%, of the total balance of other real estate owned. These properties are held primarily as a result of the foreclosures of one commercial loan relationship, which included two properties for a total of $294 thousand. The remaining residential real estate property, with a book balance of $63 thousand, was the result of the foreclosure of an unrelated borrower. The remaining $826 thousand, or 70%, of other real estate owned is the result of the foreclosure of two unrelated commercial development loans. There are four additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $214 thousand as of June 30, 2020. These loans are included in the table above and have no specific allowance allocated to them.

As of June 30, 2019, the Bank’s other real estate owned balance totaled $1.4 million. The Bank held twelve foreclosed residential real estate properties representing $583 thousand, or 41%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two commercial loan relationships, one of which included two properties for a total of $294 thousand, while the other included seven properties for a total of $174 thousand. The three remaining residential real estate properties, totaling $115 thousand, were result of the foreclosure of three unrelated borrowers. The remaining $826 thousand, or 59%, 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 $516 thousand as of June 30, 2019. These loans are included in the table above and have no specific allowance allocated to them.

As of June 30, 2020, other real estate owned acquired from the acquisition of First State totaled $7.7 million, a decrease of $4.4 million since the acquisition on April 3, 2020. During the period between acquisition and June 30, 2020, there were 81 properties sold totaling $4.4 million.

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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 $1 million 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 June 30, 2020 and December 31, 2019:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
June 30, 2020
Commercial
     Commercial Business$463,570  $8,782  $9,497  $—  $481,849  
     Commercial Real Estate365,802  53,890  7,028  —  426,720  
     Acquisition & Development114,343  10,487  4,631  —  129,461  
     SBA Paycheck Protection Program89,762  —  —  —  89,762  
          Total Commercial1,033,477  73,159  21,156  —  1,127,792  
Residential275,357  1,400  2,758  111  279,626  
Home Equity36,899  382  102  —  37,383  
Consumer3,489  36  —  —  3,525  
          Total Loans$1,349,222  $74,977  $24,016  $111  $1,448,326  
December 31, 2019
Commercial
     Commercial Business$511,590  $17,398  $11,894  $—  $540,882  
     Commercial Real Estate406,712  3,564  1,494  —  411,770  
     Acquisition & Development106,428  1,869  2,879  —  111,176  
     SBA Paycheck Protection Program—  —  —  —  —  
          Total Commercial1,024,730  22,831  16,267  —  1,063,828  
Residential267,367  1,946  2,177  114  271,604  
Home Equity34,641  383  82  —  35,106  
Consumer3,613  56  28  —  3,697  
          Total Loans$1,330,351  $25,216  $18,554  $114  $1,374,235  

Excluding the loans acquired from First State, loans classified as Special Mention totaled $74.8 million and $25.2 million as of June 30, 2020 and December 31, 2019, respectively. The increase of $49.6 million, or 197%, was concentrated in the commercial
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loan portfolio. This increase is primarily the result of the risk grade downgrade of six relationships, totaling $66.4 million. These relationships represent borrowers in industries that now represent increased risk as a result of the COVID-19 pandemic. More specifically, two relationships with loans totaling $30.8 million, include the financing on six separate hotel properties. An additional $30.0 million of the total represents loans to two relationships that were originated to finance three separate retail commercial real estate projects. The fifth relationship includes $3.4 million in loans originated to finance movie cinemas, while the final relationship includes $2.2 million in loans originated to finance an owner-occupied property that houses a private school. Offsetting these additions to the total of Special Mention loans were two unrelated commercial loans which were paid in full since December 31, 2019, for a total of $11.7 million. Additionally, the total was impacted by the charge-off of a $1.8 million government lease finance loan stemming from the non-renewal of the underlying lease agreement. Lastly, a $1.9 million loan originated to finance the infrastructure of residential home sites was reclassified as Substandard in the second quarter of 2020. These lots are adjacent to a resort hotel property and are dependent on the hotel operations for repayment. These matters are being monitored and any significant developments will result in reevaluation of the risk grades, where appropriate, and the potential recognition of future recoveries.

Excluding loans acquired from First State, loans classified as Substandard totaled $23.9 million and $18.6 million as of June 30, 2020 and December 31, 2019, respectively. The increase of $5.3 million, or 29%, was concentrated in the commercial loan portfolio. The increase is primarily the result of the risk grade downgrade of two unrelated commercial loans totaling $6.7 million. These loans include a $4.8 million loan originated to finance a hotel property, and the $1.9 million residential infrastructure loan noted above. Additionally, the risk grade downgrade of twelve unrelated commercial loans totaling $967 thousand further impacted the total of Substandard commercial loans. Meanwhile, Substandard mortgage loans increased by $451 thousand as a result of long-term erratic payment performance that has required non-accrual status of these loans. Meanwhile, the total increase of Substandard commercial loans was offset by the $1.8 million decrease in the outstanding balance of a performing Substandard loan, which is classified due to identified operational risks, and the payoff of an unrelated loan in the amount of $537 thousand. These matters are being monitored and any significant developments will result in reevaluation of the risk grades.

Loans acquired from First State classified as Special Mention and Substandard, excluding purchased credit impaired loans, totaled $182 thousand and $130 thousand, respectively, as of June 30, 2020.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and/or the Management Loan Committee (“MLC”), as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected, or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless management believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires a six-month recent history of on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or MLC.

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The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and non-accrual loans as of June 30, 2020 and December 31, 2019:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal LoansNon-Accrual90+ Days Still Accruing
June 30, 2020
Commercial
     Commercial Business$481,455  $152  $—  $242  $394  $481,849  $8,899  $—  
     Commercial Real Estate425,824  —  —  896  896  426,720  1,333  —  
     Acquisition & Development128,672  —  —  789  789  129,461  378  —  
     SBA Paycheck Protection Program89,762  —  —  —  —  89,762  —  —  
          Total Commercial1,125,713  152  —  1,927  2,079  1,127,792  10,610  —  
Residential277,230  —  647  1,749  2,396  279,626  2,734  —  
Home Equity36,999  228  —  156  384  37,383  111  —  
Consumer3,503  3  19  —  22  3,525  —  —  
          Total Loans$1,443,445  $383  $666  $3,832  $4,881  $1,448,326  $13,455  $—  
December 31, 2019
Commercial
     Commercial Business$537,602  $3,189  $47  $44  $3,280  $540,882  $2,848  $—  
     Commercial Real Estate411,070  522  178  —  700  411,770  295  —  
     Acquisition & Development110,717  180  —  279  459  111,176  390  —  
     SBA Paycheck Protection Program—  —  —  —  —  —  —  —  
          Total Commercial1,059,389  3,891  225  323  4,439  1,063,828  3,533  —  
Residential267,515  3,003  549  537  4,089  271,604  1,461  —  
Home Equity34,382  545  84  95  724  35,106  95  —  
Consumer3,610  1  58  28  87  3,697  34  —  
          Total Loans$1,364,896  $7,440  $916  $983  $9,339  $1,374,235  $5,123  $—  

Troubled Debt Restructurings

The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. At June 30, 2020 and December 31, 2019, the Bank had specific reserve allocations for TDR’s of $1.2 million and $527 thousand, respectively.

Loans considered to be troubled debt restructured loans totaled $13.9 million and $7.7 million as of June 30, 2020 and December 31, 2019, respectively. Of these totals, $4.3 million and $4.4 million, respectively, represent accruing troubled debt restructured loans and represent 24% and 46%, respectively of total impaired loans. Meanwhile, as of June 30, 2020, $3.0 million represent four loans to two borrowers that have defaulted under the restructured terms. The largest of these loans, at $2.3 million, is a commercial loan and the other three of these loans, totaling $657 thousand, are commercial acquisition and development loans that were considered TDR’s due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of June 30, 2020 and December 31, 2019.

Three commercial loans to one borrower totaling $6.1 million were classified as TDR’s in the three months ended June 30, 2020. Upon the identification of financial difficulties on the part of the borrowers, the loans were modified to allow for extended interest-only payments. Meanwhile, one mortgage loan with a balance of $87 thousand was classified as a TDR as a result of extended repayment terms. These loans have paid as agreed under their modified terms.

During the quarter ended June 30, 2020, no restructured loan defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms.

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Two unrelated commercial loans totaling $336 thousand were classified as TDR’s during the six months ended June 30, 2019. Upon the identification of financial difficulties on the part of the borrowers, these loans were modified to lower loan payments by lengthening the amortization period beyond what is typical for a commercial loan of this type. These loans have paid as agreed since they were renewed under modified terms.
New TDR's 1
Six Months Ended June 30, 2020Three Months Ended June 30, 2020
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business5  $6,237  $6,232  3  $6,083  $6,083  
     Commercial Real Estate2  159  159  —  —  —  
     Acquisition & Development—  —  —  —  —  —  
     SBA Paycheck Protection Program—  —  —  —  —  —  
          Total Commercial7  6,396  6,391  3  6,083  6,083  
Residential1  87  87  1  87  87  
Home Equity—  —  —  —  —  —  
Consumer—  —  —  —  —  —  
          Total8  6,483  6,478  4  6,170  6,170  

Six Months Ended June 30, 2019Three Months Ended June 30, 2019
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial Business2  $336  $333  1  $68  $68  
     Commercial Real Estate—  —  —  —  —  —  
     Acquisition & Development—  —  —  —  —  —  
     SBA Paycheck Protection Program—  —  —  —  —  —  
          Total Commercial2  336  333  1  68  68  
Residential—  —  —  —  —  —  
Home Equity—  —  —  —  —  —  
Consumer—  —  —  —  —  —  
          Total2  $336  $333  1  $68  $68  
1 The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.

Purchased Credit Impaired Loans

As a result of the FDIC-assisted acquisition of First State on April 3, 2020, the Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The Company did not hold any purchased credit impaired loans as of June 30, 2019 or December 31, 2019.
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The carrying amount of the purchased credit impaired loan portfolio is as follows:
(Dollars in thousands)As of June 30, 2020
Commercial$20,904  
Residential25,928  
Home Equity—  
Consumer1,603  
Outstanding balance$48,435  
Carrying amount, net of allowance$48,262  

Accretable yield, or income expected to be collected, is as follows:
(Dollars in thousands)As of June 30, 2020
Beginning balance$—  
New loans purchased11,746  
Accretion of income(959) 
Reclassification from non-accretable difference545  
Disposals—  
Ending balance$11,332  

For the purchased credit impaired loan portfolio disclosed above, the Company increased the allowance for loan losses by $173 thousand during the three and six month periods ended June 30, 2020. No allowances for loan losses were reversed during the three and six month periods ended June 30, 2020.

Purchased credit impaired loans purchased during the three and six month periods ended June 30, 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
(Dollars in thousands)As of June 30, 2020
Contractually required payments receivable of loans purchased during the period:
Commercial$36,046  
Residential47,787  
Home Equity—  
Consumer2,990  
Cash flows expected to be collected at acquisition$86,823  
Fair value of loans acquired at acquisition$50,235  

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of June 30, 2020, the Company held no such loans.

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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 June 30, 2020 for the purchased credit impaired loan portfolio:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
December 31, 2019$—  $—  $—  $—  $—  
     Charge-offs—  —  —  —  —  
     Recoveries—  —  —  —  —  
     Provision 121  52  —  —  173  
ALL balance at June 30, 2020$121  $52  $—  $—  $173  
Individually evaluated for impairment$—  $—  $—  $—  $—  
Collectively evaluated for impairment$121  $52  $—  $—  173  

(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at March 31, 2020$—  $—  $—  $—  $—  
     Charge-offs—  —  —  —  —  
     Recoveries—  —  —  —  —  
     Provision 121  52  —  —  173  
ALL balance at June 30, 2020$121  $52  $—  $—  $173  

The following table summarizes the primary segments of the Company's purchased credit impaired loan portfolio as of June 30, 2020:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
     Individually evaluated for impairment$—  $—  $—  $—  $—  
     Collectively evaluated for impairment19,799  27,033  —  1,603  48,435  
Total Loans19,799  27,033  —  1,603  48,435  


The following table represents the classes of the purchased credit impaired 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 June 30, 2020:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
June 30, 2020
Commercial
     Commercial Business$14,623  $1,425  $402  $—  $16,450  
     Commercial Real Estate1,340  —  16  —  1,356  
     Acquisition & Development1,853  —  140  —  1,993  
          Total Commercial17,816  1,425  558  —  19,799  
Residential26,013  —  1,020  —  27,033  
Home Equity—  —  —  —  —  
Consumer1,128  233  242  —  1,603  
          Total Loans$44,957  $1,658  $1,820  $—  $48,435  

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The following table presents the classes of the purchased credit impaired loan portfolio summarized by aging categories of performing loans and non-accrual loans as of June 30, 2020:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal LoansNon-Accrual90+ Days Still Accruing
June 30, 2020
Commercial
     Commercial Business$14,615  $230  $14  $1,591  $1,835  $16,450  $448  $—  
     Commercial Real Estate1,292  48  —  16  64  1,356  64  —  
     Acquisition & Development1,668  144  41  140  325  1,993  140  —  
          Total Commercial17,575  422  55  1,747  2,224  19,799  652  —  
Residential21,263  935  568  4,267  5,770  27,033  3,496  —  
Home Equity—  —  —  —  —  —  —  —  
Consumer1,354  4  3  242  249  1,603  241  —  
          Total Loans$40,192  $1,361  $626  $6,256  $8,243  $48,435  $4,389  $—  

As the Company's purchased credit impaired loan portfolio is accounted for in pools with similar risk characteristics in accordance with ASC 310-30, this portfolio is not subject to the impaired loan and TDR guidance. Rather, the revised estimated future cash flows of the individually modified loans are included in the estimated future cash flows of the pool.

Note 5 – Premises and Equipment

Premises and equipment were as follows:

(Dollars in thousands)June 30, 2020December 31, 2019
Land$3,936  $3,105  
Buildings and improvements14,350  13,352  
Furniture, fixtures and equipment16,440  15,553  
Construction in progress977  1,019  
Leasehold improvements2,951  1,985  
38,654  35,014  
Accumulated depreciation(14,068) (13,040) 
Net premises and equipment$24,586  $21,974  

The Company leases certain premises and equipment under operating and finance leases. At June 30, 2020, the Company had lease liabilities totaling $19.6 million and right-of-use assets totaling $18.3 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the three and six months ended June 30, 2020, the weighted average remaining lease term for finance leases was 2.2 years and the weighted average discount rate used in the measurement of finance lease liabilities was 2.80%. For the three and six months ended June 30, 2020, the weighted average remaining lease term for operating leases was 10.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.33%.

Lease costs were as follows:
(Dollars in thousands)Six Months Ended June 30, 2020Three Months Ended June 30, 2020Six Months Ended June 30, 2019Three Months Ended June 30, 2019
Amortization of right-of-use assets, finance leases$36  $18  $40  $20  
Interest on lease liabilities, finance leases2142
Operating lease cost1,121  5771007477
Short-term lease cost26124116
Variable lease cost20102010
Total lease cost$1,205  $618  $1,112  $525  

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There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the six months ended June 30, 2020.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as follows:
June 30, 2020
(Dollars in thousands)Finance LeasesOperating Leases
2020$77  $1,337  
202177  1,334  
202213  1,348  
2023—  1,246  
2024—  1,214  
2025 and thereafter—  17,219  
Total future minimum lease payments$167  $23,698  
Less: Amounts representing interest(5) (4,211) 
Present value of net future minimum lease payments$162  $19,487  

Note 6 – Deposits

Deposits were as follows:
(Dollars in thousands)June 30, 2020December 31, 2019
Noninterest-bearing demand$528,527  $278,547  
Interest-bearing demand355,324  351,435  
Savings and money markets536,378  363,026  
Time deposits, including CDs and IRAs443,734  272,034  
Total deposits$1,863,963  $1,265,042  
Time deposits that meet or exceed the FDIC insurance limit$8,420  $8,955  

Maturities of time deposits were as follows:
(Dollars in thousands)June 30, 2020
2020$271,291  
202179,804  
202261,148  
202320,388  
202411,103  
Total$443,734  


Note 7 – Borrowed Funds

Short-term borrowings

Along with traditional deposits, the Bank has access to short-term borrowings from the FHLB, Federal Reserve discount window borrowings, and Fed Funds purchased from correspondent banks to fund its operations and investments. Short-term borrowings totaled $0.0 million at June 30, 2020, compared to $192.1 million at December 31, 2019.
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Information related to short-term borrowings is summarized as follows:
(Dollars in thousands)As of and for the three months ended June 30, 2020As of and for the year ended December 31, 2019
Balance at end of period$—  $192,063  
Average balance during the period63,635  187,226  
Maximum month-end balance154,248  240,811  
Weighted-average rate during the period0.23 %2.24 %
Weighted-average rate at end of period0.39 %1.81 %
Repurchase agreements

Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase (“repurchase agreements”) with clients representing funds deposited by clients, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with clients 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 client accounts and securities which are pledged on an individual security basis.

The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the amount of cash received in connection with the transaction and included in repurchase agreements on the consolidated balance sheets. The primary risk with the Company’s repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

All of the Company’s repurchase agreements were overnight agreements at June 30, 2020 and December 31, 2019. These borrowings were collateralized with investment securities with a carrying value of $10.0 million and $10.5 million at June 30, 2020 and December 31, 2019, respectively, and were comprised of U.S. Government Agencies and Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.

Repurchase agreements totaled $9.8 million at June 30, 2020, compared to $10.2 million at December 31, 2019.

Information related to repurchase agreements is summarized as follows:
(Dollars in thousands)As of and for the three months ended June 30, 2020As of and for the year ended December 31, 2019
Balance at end of period$9,815  $10,172  
Average balance during the period9,682  11,252  
Maximum month-end balance9,815  14,655  
Weighted-average rate during the period0.17 %0.43 %
Weighted-average rate at end of period0.06 %0.44 %

Long-term notes from the FHLB were as follows:
(Dollars in thousands)June 30, 2020December 31, 2019
Fixed interest rate note, originated in April 2007, due in April 2022, with interest of 5.18% payable monthly$810  $822  
Fixed interest rate notes, originating in November 2019, due between November 2022 and November 2024, with interest of between 1.74% and 1.81% and interest-only payments monthly30,000  30,000  
Fixed interest rate note, originated in December 2017, due in December 2020, with interest of 2.18% and interest-only payments monthly5,800  —  
 $36,610  $30,822  

The fixed interest rate note, originated in December 2017, due in December 2020, with interest of 2.18% and interest-only payments monthly, was acquired as a result of the First State acquisition on April 3, 2020.
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Subordinated Debt

Information related to subordinated debt is summarized as follows:
(Dollars in thousands)As of and for the three months ended June 30, 2020As of and for the year ended December 31, 2019
Balance at end of period$4,124  $4,124  
Average balance during the period4,124  12,125  
Maximum month-end balance4,124  17,524  
Weighted-average rate during the period2.31 %6.35 %
Weighted-average rate at end of period1.93 %3.51 %

In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The proceeds from the sale of the Trust Preferred Securities will be loaned to the Company under subordinated Debentures (the “Debentures”) issued to the Trust pursuant to an Indenture. The Debentures are the only asset of the Trust. The Trust Preferred Securities have been issued to a pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s Tier 1 capital.

The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012. Interest payments are due in March, June, September, and December and are adjusted at the interest due dates at a rate of 1.62% over the three-month LIBOR Rate. The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees.

On June 30, 2014, the Company issued its Convertible Subordinated Promissory Notes Due 2024 (the “Notes”) to various investors in the aggregate principal amount of $29,400,000. The Notes were issued in $100,000 increments per Note subject to a minimum investment of $1,000,000. The Notes expire 10 years after the initial issuance date of the Notes (the “Maturity Date”).

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

The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors of the Federal Reserve System, the Company may, after the Notes have been outstanding for 5 years, and without premium or penalty, prepay all or a portion of the unpaid principal amount of any Note together with the unpaid interest accrued on such portion of the principal amount of such Note. All such prepayments shall be made pro rata among the holders of all outstanding Notes.

At the election of a holder, any or all of the Notes may be converted into shares of common stock during the 5-day period after the first, second, third, fourth, and fifth anniversaries of the issuance of the Notes or upon a notice to prepay by the Company. On December 28, 2017, the Company distributed notices to the holders of the Notes that provide that the Company has elected to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 1, 2019, which is the final conversion date for the Notes. The Notes will convert into common stock based on $16 per share of the Company’s common stock. The conversion price will be subject to anti-dilution adjustments for certain events such as stock splits, reclassifications, non-cash distributions, extraordinary cash dividends, pro rata repurchases of common stock, and business combination transactions. The Company must give 20 days’ notice to the holders of the Company’s intent to prepay the Notes, so that holders may execute the conversion right set forth above if a holder so desires.

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Repayment of the Notes is subordinated to the Company’s outstanding senior debt including (if any) without limitation, senior secured loans. No payment will be made by the Company, directly or indirectly, on the Notes, unless and until all of the senior debt then due has been paid in full. Notwithstanding the foregoing, so long as there exists no event of default under any senior debt, the Company would make, and a holder would receive and retain for the holder’s account, regularly scheduled payments of accrued interest and principal pursuant to the terms of the Notes.

The Company must obtain a consent of the holders of the Notes prior to issuing any new senior debt in excess of $15,000,000 after the date of issuance of the Notes and prior to the Maturity Date.

An event of default will occur upon the Company’s bankruptcy or any failure to pay interest, principal, or other amounts owing on the Notes when due. Upon the occurrence and during the continuance of an event of default (but subject to the subordination provisions of the Notes) the holders of a majority of the outstanding principal amount of the Notes may declare all or any portion of the outstanding principal amount of the Notes due and payable and demand immediate payment of such amount.

The Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed on any interest payment date after a date five years from the original issue date. As of June 30, 2020, all subordinated debt notes have been converted or redeemed.

The Company reflects subordinated debt in the amount of $4.1 million as of June 30, 2020 and $4.1 million as of December 31, 2019 and interest expense of $58 thousand and $572 thousand for the six months ended June 30, 2020 and 2019.

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

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

A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):
YearAmount
2020$5,817  
202132  
202210,761  
202310,000  
202410,000  
Thereafter4,124  
 $40,734  

Note 8 – Fair Value of Financial Instruments

Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.

Accounting standards establish a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by these standards are as follows:

Level I:Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
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The methods of determining the fair value of assets and liabilities presented in this footnote are consistent with our methodologies disclosed in Note 17, “Fair Value of Financial Instruments” and Note 18, “Fair Value Measurement” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s 2019 Annual Report on Form 10-K.

Assets Measured on a Recurring Basis

As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following measurements are made on a recurring basis.

•Available-for-sale investment securities – Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds, and corporate debt securities. There have been no changes in valuation techniques for the three and six months ended June 30, 2020. Valuation techniques are consistent with techniques used in prior periods. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments. The Company classified investments in government securities as Level II instruments and valued them using the market approach.

•Equity securities – Certain equity securities are recorded at fair value on both a recurring and nonrecurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions, and other factors such as credit loss assumptions. The valuation methodologies utilized may include significant unobservable inputs. There have been no changes in valuation techniques for the three and six months ended June 30, 2020. Valuation techniques are consistent with techniques used in prior periods.

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

•Interest rate lock commitments – The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.

•Mortgage-backed security hedges – MBS hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.

•Interest rate swap – Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

•Fair value hedge – Treated like an interest rate swap, fair value hedges are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

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The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of June 30, 2020 and December 31, 2019 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 June 30, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $41,980  $—  $41,980  
     U.S. Sponsored Mortgage backed securities—  34,274  —  34,274  
     Municipal securities—  89,748  40,457  130,205  
     Other securities—  14,240  —  14,240  
     Equity securities383  —  —  383  
     Loans held for sale—  242,089  —  242,089  
     Interest rate lock commitment—  —  7,338  7,338  
     Interest rate swap—  16,514  —  16,514  
     Fair value hedge—  2,430  —  2,430  
     Bank-owned life insurance—  35,818  —  35,818  
Liabilities:
     Interest rate swap—  16,514  —  16,514  
     Fair value hedge—  2,659  —  2,659  
     Mortgage-backed security hedges—  858  —  858  

 December 31, 2019
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
     U.S. Government Agency securities$—  $51,996  $—  $51,996  
     U.S. Sponsored Mortgage backed securities—  58,312  —  58,312  
     Municipal securities—  75,833  37,259  113,092  
     Other securities—  12,421  —  12,421  
     Loans held for sale—  109,788  —  109,788  
     Interest rate lock commitment—  —  1,660  1,660  
     Interest rate swap—  5,722  —  5,722  
     Fair value hedge—  1,770  —  1,770  
     Bank-owned life insurance—  35,374  —  35,374  
Liabilities:
     Interest rate swap—  5,722  —  5,722  
     Fair value hedge—  1,418  —  1,418  
     Mortgage-backed security hedges—  186  —  186  

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The following table represents recurring level III assets:
(Dollars in thousands)Interest Rate Lock CommitmentsMunicipal SecuritiesEquity SecuritiesTotal
Balance at December 31, 2019$1,660  $37,259  $—  $38,919  
Realized and unrealized gains included in earnings5,678  —  —  5,678  
Purchase of securities—  20,780  —  20,780  
Unrealized gain included in other comprehensive income (loss)—  1,645  —  1,645  
Unrealized loss included in other comprehensive income (loss)—  (19,227) —  (19,227) 
Balance at June 30, 2020$7,338  $40,457  $—  $47,795  
Balance at March 31, 2020$5,791  $36,626  $—  $42,417  
Realized and unrealized gains included in earnings1,547  —  —1,547  
Purchase of securities—  20,258  —  20,258  
Unrealized gain included in other comprehensive income (loss)—  1,366  —  1,366  
Unrealized loss included in other comprehensive income (loss)—  (17,793) —  (17,793) 
Balance at June 30, 2020$7,338  $40,457  $—  $47,795  
Balance at December 31, 2018$1,750  $33,122  $300  $35,172  
Realized and unrealized gains included in earnings791  —  —  791  
Purchase of securities—  109  1,250  1,359  
Unrealized gain included in other comprehensive income (loss)—  6,915  —  6,915  
Unrealized loss included in other comprehensive income (loss)—  (9,609) —  (9,609) 
Balance at June 30, 2019$2,541  $30,537  $1,550  $34,628  
Balance at March 31, 2019$2,256  $36,801  $750  $39,807  
Realized and unrealized losses included in earnings285  —  —  285  
Purchase of securities—  109  800  909  
Unrealized gain included in other comprehensive income (loss)—  2,160  —  2,160  
Unrealized loss included in other comprehensive income (loss)—  (8,424) —  (8,424) 
Balance at June 30, 2019$2,541  $30,537  $1,550  $34,628  

Assets Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets, and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during 2020 and 2019 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.

•Impaired loans – Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually
34

impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

•Other real estate owned – Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.

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

Assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019 are included in the table below:
June 30, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$—  $—  $16,201  $16,201  
Other real estate owned—  —  8,907  8,907  
Equity securities—  —  19,081  19,081  

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

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The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at June 30, 2020 and December 31, 2019.
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
June 30, 2020
Nonrecurring measurements:
Impaired loans$16,201  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$8,907  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Equity securities$19,081  Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities (Local TIF bonds)$40,457  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
Interest rate lock commitments$7,338  Pricing modelPull through rates76% - 84%
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
December 31, 2019
Nonrecurring measurements:
Impaired loans$8,909  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$1,397  
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Equity securities$18,514  Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities (Local TIF bonds)$37,259  
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
Interest rate lock commitments$1,660  Pricing modelPull through rates77% - 82%
1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
2 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
3 Fair value determined through independent analysis of liquidity, rating, yield and duration.
4 Appraisals may be adjusted for qualitative factors such as local economic conditions.

Estimated fair value of financial instruments have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments.
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The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows:

Fair Value Measurements at:
(Dollars in thousands)Carrying ValueEstimated Fair ValueQuoted Prices in Active Markets for Identical Assets (Level I)Significant Other Observable Inputs (Level II)Significant Unobservable Inputs (Level III)
June 30, 2020
Financial assets:
     Cash and cash equivalents$78,854  $78,854  $78,854  $—  $—  
     Certificates of deposits with other banks13,046  13,387  —  13,387  —  
     Securities available-for-sale220,699  220,699  —  180,242  40,457  
     Equity securities19,464  19,464  383  —  19,081  
     Loans held for sale242,089  242,089  —  242,089  —  
     Loans, net1,476,930  1,502,388  —  —  1,502,388  
     Mortgage servicing rights3,331  3,331  —  —  3,331  
     Interest rate lock commitment7,338  7,338  —  —  7,338  
     Interest rate swap16,514  16,514  —  16,514  —  
     Accrued interest receivable8,900  8,900  —  1,515  7,385  
     Bank-owned life insurance35,818  35,818  —  35,818  —  
Financial liabilities:
     Deposits$1,863,963  $1,892,397  $—  $1,892,397  $—  
     Repurchase agreements9,815  9,815  —  9,815  —  
     FHLB and other borrowings36,610  37,336  —  37,336  —  
     Mortgage-backed security hedges858  858  —  858  —  
     Interest rate swap16,514  16,514  —  16,514  —  
     Fair value hedge2,659  2,659  —  2,659  —  
     Accrued interest payable622  622  —  622  —  
     Subordinated debt4,124  4,124  —  4,124  —  
December 31, 2019
Financial assets:
     Cash and cash equivalents$28,002  $28,002  $28,002  $—  $—  
     Certificates of deposits with other banks12,549  12,586  —  12,586  —  
     Securities available-for-sale235,821  235,821  —  198,562  37,259  
     Equity securities18,514  18,514  —  —  18,514  
     Loans held for sale109,788  109,788  —  109,788  —  
     Loans, net1,362,766  1,364,706  —  —  1,364,706  
     Mortgage servicing rights348  348  —  —  348  
     Interest rate lock commitment1,660  1,660  —  —  1,660  
     Interest rate swap5,722  5,722  —  5,722  —  
     Fair value hedge1,770  1,770  —  1,770  
     Accrued interest receivable7,909  7,909  —  1,591  6,317  
     Bank-owned life insurance35,374  35,374  —  35,374  —  
Financial liabilities:
     Deposits$1,265,042  $1,249,135  $—  $1,249,135  $—  
     Repurchase agreements10,172  10,172  —  10,172  —  
     FHLB and other borrowings222,885  222,891  —  222,891  —  
     Mortgage-backed security hedges186  186  —  186  —  
     Interest rate swap5,722  5,722  —  5,722  —  
     Fair value hedge1,418  1,418  —  1,418  —  
     Accrued interest payable1,060  1,060  —  1,060  —  
     Subordinated debt4,124  4,124  —  4,124  —  

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Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

Note 9 – Stock Offerings

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

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

In May 2020, the Company repurchased 100 shares of its outstanding common stock, with an average share price of $14.18.

In June 2020, the Company repurchased 29,200 shares of its outstanding common stock, with an average share price of $13.53.

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Note 10 – Net Income Per Common Share

The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income less dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted average number of shares outstanding increased by both the number of shares that would be issued assuming the exercise of stock options or restricted stock unit awards under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt if dilutive.
 Six Months Ended June 30Three Months Ended June 30
(Dollars in thousands except shares and per share data)2020201920202019
Numerator for basic earnings per share:
Net income from continuing operations$19,082  $18,123  $18,034  $14,931  
Less: Dividends on preferred stock229  243  115  122  
Net income from continuing operations available to common shareholders - basic18,853  17,880  17,919  14,809  
Net income from discontinued operations available to common shareholders - basic and diluted—  446  —  446  
Net income available to common shareholders - basic$18,853  $18,326  $17,919  $15,255  
Numerator for diluted earnings per share:
Net income from continuing operations available to common shareholders - basic$18,853  $17,880  $17,919  $14,809  
Add: Dividends on convertible preferred stock—  243  —  122  
Add: Interest on subordinated debt (tax effected)—  346  —  174  
Net income from continuing operations available to common shareholders - diluted$18,853  $18,469  $17,919  $15,105  
Denominator:
Total average shares outstanding11,948,790  11,625,903  11,954,813  11,644,061  
Effect of dilutive convertible preferred stock—  489,625  —  489,625  
Effect of dilutive convertible subordinated debt—  775,000  —  775,000  
Effect of dilutive stock options and restricted stock units207,424  249,084  57,032  246,616  
Total diluted average shares outstanding12,156,214  13,139,612  12,011,845  13,155,302  
Earnings per share from continuing operations - basic$1.58  $1.54  $1.50  $1.27  
Earnings per share from discontinued operations - basic$—  $0.04  $—  $0.04  
Earnings per share - basic$1.58  $1.58  $1.50  $1.31  
Earnings per share from continuing operations - diluted$1.55  $1.41  $1.49  $1.15  
Earnings per share from discontinued operations - diluted$—  $0.03  $—  $0.03  
Earnings per share - diluted$1.55  $1.44  $1.49  $1.18  

For the three and six months ended June 30, 2020 and 2019, approximately 859 thousand and 386 thousand, respectively, options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the three months ended June 30, 2020 and 2019, approximately 218 thousand and 142 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the six months ended June 30, 2020 and 2019, approximately 192 thousand and 142 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

39

Note 11 – Segment Reporting

The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The fintech division, Chartwell, and Paladin reside in the commercial and retail banking segment. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by MVB Mortgage.

Information about the reportable segments and reconciliation to the consolidated financial statements for the three and six-month periods ended June 30, 2020 and June 30, 2019 are as follows:

Three Months Ended June 30, 2020Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$19,182  $3,538  $1  $(947) $21,774  
Interest expense3,027  1,517  23  (1,251) 3,316  
Net interest income16,155  2,021  (22) 304  18,458  
Provision for loan losses6,598  (2) —  —  6,596  
Net interest income after provision for loan losses9,557  2,023  (22) 304  11,862  
Noninterest Income:
Mortgage fee income40  15,208  —  (304) 14,944  
Other income17,792  13,354  1,679  (2,256) 30,569  
Total noninterest income17,832  28,562  1,679  (2,560) 45,513  
Noninterest Expenses:   
Salaries and employee benefits6,170  13,584  2,905  —  22,659  
Other expense9,124  2,315  1,491  (2,256) 10,674  
Total noninterest expenses15,294  15,899  4,396  (2,256) 33,333  
Income (loss) before income taxes12,095  14,686  (2,739) —  24,042  
Income tax expense (benefit)2,880  3,800  (672) —  6,008  
Net income (loss)$9,215  $10,886  $(2,067) $—  $18,034  
Preferred stock dividends—  —  115  —  115  
Net income (loss) available to common shareholders$9,215  $10,886  $(2,182) $—  $17,919  
Capital Expenditures for the three-month period ended June 30, 2020$1,105  $30  $—  $—  $1,135  
Total Assets as of June 30, 20202,219,352  342,497  232,026  (578,718) 2,215,157  
Total Assets as of December 31, 20191,953,975  248,382  216,411  (474,654) 1,944,114  
Goodwill as of June 30, 20202,350  16,882  —  —  19,232  
Goodwill as of December 31, 20192,748  16,882  —  —  19,630  

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Three Months Ended June 30, 2019Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$18,820  $2,032  $1  $(383) $20,470  
Interest expense4,743  1,499  287  (588) 5,941  
Net interest income14,077  533  (286) 205  14,529  
Provision for loan losses625  (25) —  —  600  
Net interest income after provision for loan losses13,452  558  (286) 205  13,929  
Noninterest income:
Mortgage fee income277  9,792  —  (205) 9,864  
Other income15,464  1,135  1,495  (1,571) 16,523  
Total noninterest income15,741  10,927  1,495  (1,776) 26,387  
Noninterest Expense:
Salaries and employee benefits4,220  7,038  2,022  —  13,280  
Other expense5,493  1,842  1,346  (1,571) 7,110  
Total noninterest expenses9,713  8,880  3,368  (1,571) 20,390  
Income (loss) before income taxes19,480  2,605  (2,159) —  19,926  
Income tax expense (benefit)4,785  703  (493) —  4,995  
Net income (loss) from continuing operations14,695  1,902  (1,666) —  14,931  
Income from discontinued operations, before income taxes—  —  600  —  600  
Income tax expense - discontinued operations—  —  154  —  154  
Net income from discontinued operations—  —  446  —  446  
Net income (loss)$14,695  $1,902  $(1,220) $—  $15,377  
Preferred stock dividends—  —  122  —  122  
Net income (loss) available to common shareholders$14,695  $1,902  $(1,342) $—  $15,255  
Capital Expenditures for the three-month period ended June 30, 2019$414  $23  $77  $—  $514  
Total Assets as of June 30, 20191,831,419  225,012  217,217  (440,630) 1,833,018  
Total Assets as of December 31, 20181,753,932  165,430  196,537  (364,930) 1,750,969  
Goodwill as of June 30, 20191,598  16,882  —  —  18,480  
Goodwill as of December 31, 20181,598  16,882  —  —  18,480  

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Six Months Ended June 30, 2020Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$37,956  $5,956  $2  $(1,441) $42,473  
Interest expense6,865  2,904  58  (1,983) 7,844  
Net interest income31,091  3,052  (56) 542  34,629  
Provision for loan losses7,730  4  —  —  7,734  
Net interest income after provision for loan losses23,361  3,048  (56) 542  26,895  
Noninterest Income:
Mortgage fee income150  26,555  —  (542) 26,163  
Other income21,138  9,792  3,183  (3,913) 30,200  
Total noninterest income21,288  36,347  3,183  (4,455) 56,363  
Noninterest Expenses:
Salaries and employee benefits12,036  21,468  5,337  —  38,841  
Other expense15,783  4,712  2,566  (3,913) 19,148  
Total noninterest expenses27,819  26,180  7,903  (3,913) 57,989  
Income (loss) before income taxes16,830  13,215  (4,776) —  25,269  
Income tax expense (benefit)3,892  3,451  (1,156) —  6,187  
Net income (loss)$12,938  $9,764  $(3,620) $—  $19,082  
Preferred stock dividends—  —  229  —  229  
Net income (loss) available to common shareholders$12,938  $9,764  $(3,849) $—  $18,853  
Capital Expenditures for the six-month period ended June 30, 2020$2,400  $99  $20  $—  $2,519  
Total Assets as of June 30, 20202,219,352  342,497  232,026  (578,718) 2,215,157  
Total Assets as of December 31, 20191,953,975  248,382  216,411  (474,654) 1,944,114  
Goodwill as of June 30, 20202,350  16,882  —  —  19,232  
Goodwill as of December 31, 20192,748  16,882  —  —  19,630  

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Six Months Ended June 30, 2019Commercial & Retail BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$37,147  $3,570  $3  $(627) $40,093  
Interest expense9,497  2,492  572  (969) 11,592  
Net interest income27,650  1,078  (569) 342  28,501  
Provision for loan losses872  28  —  —  900  
Net interest income after provision for loan losses26,778  1,050  (569) 342  27,601  
Noninterest Income:
Mortgage fee income386  16,489  —  (341) 16,534  
Other income17,030  1,611  3,274  (3,297) 18,618  
Total noninterest income17,416  18,100  3,274  (3,638) 35,152  
Noninterest Expenses:
Salaries and employee benefits8,615  12,197  4,202  —  25,014  
Other expense10,845  3,867  2,408  (3,296) 13,824  
Total noninterest expenses19,460  16,064  6,610  (3,296) 38,838  
Income (loss) before income taxes24,734  3,086  (3,905) —  23,915  
Income tax expense (benefit)5,839  849  (896) —  5,792  
Net income (loss) from continuing operations18,895  2,237  (3,009) —  18,123  
Income from discontinued operations, before income taxes—  —  600  —  600  
Income tax expense - discontinued operations—  —  154  —  154  
Net income from discontinued operations—  —  446  —  446  
Net income (loss)$18,895  $2,237  $(2,563) $—  $18,569  
Preferred stock dividends—  —  243  —  243  
Net income (loss) available to common shareholders$18,895  $2,237  $(2,806) $—  $18,326  
Capital Expenditures for the three-month period ended June 30, 2019$503  $27  $99  $—  $629  
Total Assets as of June 30, 20191,831,419  225,012  217,217  (440,630) 1,833,018  
Total Assets as of December 31, 20181,753,932  165,430  196,537  (364,930) 1,750,969  
Goodwill as of June 30, 20191,598  16,882  —  —  18,480  
Goodwill as of December 31, 20181,598  16,882  —  —  18,480  

Commercial & Retail Banking

For the three months ended June 30, 2020, the Commercial & Retail Banking segment earned $9.2 million compared to $14.7 million in 2019.

Net interest income increased by $2.1 million, primarily the result of an increase of $638 thousand in interest and fees on loans and a decrease of $1.5 million in interest on deposits. The increase in interest and fees on loans was the result of an increase of $283.5 million in the average loan balances and $409 thousand in accretion from the acquired First State loans. The decrease in interest on deposits was the result of a decrease of 84 basis points in the cost of interest-bearing liabilities, even with an increase of $182.2 million in the average balance of deposits.

Noninterest income increased by $2.1 million which was the result of an increase of $9.6 million in the gain on sale of banking centers, an increase of $4.7 million in the bargain purchase gain, an increase of $1.3 million in compliance consulting income, and an increase of $602 thousand in the gain on sale of securities. These increases were partially offset by a decrease of $13.6 million in the holding gain on equity securities.
43


Noninterest expense increased by $5.6 million, primarily the result of an increase of $2.0 million in salaries and employee benefits expense, an increase of $2.0 million in professional fees, and an increase of $721 thousand in data processing and communications expense. The increase in salaries and employee benefits expense is primarily the result of the build out of the Fintech team and the build-out of other Company personnel. The increases in professional fees and data processing and communications expense were primarily the result of deal costs related to the acquisition of First State, the acquisition of Paladin, LLC, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

In addition, provision expense increased $6.0 million due to the recognition of increased risk within the loan portfolio as a result of the COVID-19 pandemic reflected through analysis of the qualitative adjustment factors, changes in the total outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and resulting changes in the historical loss rates.

For the six months ended June 30, 2020, the Commercial & Retail Banking segment earned $12.9 million compared to $18.9 million in 2019.

Net interest income increased by $3.4 million, primarily the result of an increase of $1.3 million in interest and fees on loans and a decrease of $1.7 million in interest on deposits. The increase in interest and fees on loans was the result of an increase of $215.0 million in the average loan balances and $409 thousand in accretion from the acquired First State loans. The decrease in interest on deposits was the result of a decrease of 61 basis points in the cost of interest-bearing liabilities, even with an increase of $135.7 million in the average balance of deposits.

Noninterest income increased by $3.9 million which was the result of an increase of $9.6 million in the gain on sale of banking centers, an increase of $4.7 million in the bargain purchase gain, an increase of $2.6 million in compliance consulting income, and an increase of $998 thousand in the gain on sale of available-for-sale securities. These increases were partially offset by a decrease of $13.7 million in the holding gain on equity securities.

Noninterest expense increased by $8.4 million, primarily the result of an increase of $3.4 million in salaries and employee benefits expense, an increase of $2.5 million in professional fees, an increase of $910 thousand in data processing and communications expense, an increase of $729 thousand in other operating expenses, and an increase of $552 thousand in travel, entertainment, dues, and subscriptions expense. The increase in salaries and employee benefits expense is primarily the result of the build out of the Fintech team and the build-out of other Company personnel. The increases in professional fees and data processing and communications expense were primarily the result of deal costs related to the acquisition of First State, the acquisition of Paladin, LLC, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

In addition, provision expense increased $6.9 million due to the recognition of increased risk within the loan portfolio as a result of the COVID-19 pandemic reflected through analysis of the qualitative adjustment factors, changes in the total outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and resulting changes in the historical loss rates. In addition, adjustments to the loan portfolio segmentation used within the allowance for loan losses calculation impacted provision expense.

Mortgage Banking

For the three months ended June 30, 2020, the Mortgage Banking segment earned $10.9 million compared to $1.9 million in 2019.

Net interest income increased $1.5 million, which was the result of an increase of $1.5 million in interest and fees on loans. The increase in interest and fees on loans was due to an increase of $153.8 million in average real estate loans.

Noninterest income increased by $17.6 million, primarily the result of an increase of $12.3 million in the gain on derivatives and an increase of $5.4 million in mortgage fee income. The increase in the gain on derivatives was largely the result of an increase of $4.4 million in the valuation of the open trades used to hedge the locked mortgage loan pipeline. The increase in mortgage fee income is driven by an increase of $451.4 million in mortgage loans sold for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Noninterest expense increased by $7.0 million, which was the result of an increase of $6.5 million in salaries and employee benefits expense, due to an increase in mortgage production volume, an increase of $174 thousand in mortgage processing expense, an increase of $146 thousand in other operating expenses, and an increase of $135 thousand in professional fees.

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For the six months ended June 30, 2020, the Mortgage Banking segment earned $9.8 million compared to $2.2 million in 2019.

Net interest income increased by $2.0 million, which was the result of an increase of $2.4 million in interest and fees on loans, partially offset by an increase of $412 thousand in interest on FHLB and other borrowings. The increase in interest and fees on loans was primarily the result of an increase of $119.4 million in average real estate loans. The increase in interest on FHLB and other borrowings was due to an increase of $119.8 million in average borrowings.

Noninterest income increased by $18.2 million, primarily the result of an increase of $10.1 million in mortgage fee income and an increase of $8.3 million in the gain on derivatives. The increase in mortgage fee income was driven by an increase of $623.0 million in mortgage loans sold for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in the gain on derivatives of $8.3 million, was largely the result of a 212.0% increase in the locked mortgage pipeline for the six months ended June 30, 2020 compared to a 104.4% increase in the locked mortgage pipeline for the six months ended June 30, 2019.

Noninterest expense increased by $10.1 million, which was the result of an increase of $9.3 million in salaries and employees benefits expense, due to an increase in mortgage production volume, an increase of $382 thousand in professional fees, and an increase of $216 thousand in mortgage processing expense.

Financial Holding Company

Excluding discontinued operations, for the three months ended June 30, 2020, the Financial Holding Company segment lost $2.1 million compared to a loss of $1.7 million in 2019. Interest expense decreased $264 thousand, noninterest income increased $184 thousand, and noninterest expense increased $1.0 million. In addition, the income tax benefit increased $179 thousand. The decrease in interest expense was due to a $264 thousand decrease in interest on subordinated debt. The increase in noninterest income was primarily the result of an increase of $143 thousand in intercompany services income related to Regulation W and an increase of $39 thousand in the gain on sale of securities. The increase in noninterest expense was primarily the result of an increase of $883 thousand in salaries and employee benefits expense and an increase of $368 thousand in professional fees.

Excluding discontinued operations, for the six months ended June 30, 2020, excluding discontinued operations, the Financial Holding Company segment lost $3.6 million compared to a loss of $3.0 million in 2019. Interest expense decreased $514 thousand, noninterest income decreased $91 thousand, and noninterest expense increased $1.3 million. In addition, the income tax benefit increased $260 thousand. The decrease in interest expense was due to a $514 thousand decrease in interest on subordinated debt. The decrease in noninterest income was primarily the result of a decrease of $98 thousand in the holding gain on equity securities. The increase in noninterest expense was primarily the result of an increase of $1.1 million in salaries and employee benefits expense and an increase of $394 thousand in professional fees.

Note 12 – Pension and Supplemental Executive Retirement Plans

The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees. Benefits are based on years of service and the employee’s compensation. Accruals under the Plan were frozen as of May 31, 2014. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on May 31, 2014 of 4.46%.

Information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of June 30, 2020 and 2019 is as follows:
(Dollars in thousands)Six Months Ended June 30, 2020Six Months Ended June 30, 2019Three Months Ended June 30, 2020Three Months Ended June 30, 2019
Service cost$—  $—  $—  $—  
Interest cost182  196  91  98  
Expected Return on Plan Assets(218) (204) (109) (102) 
Amortization of Net Actuarial Loss210  136  105  68  
Amortization of Prior Service Cost—  —  —  —  
     Net Periodic Benefit Cost$174  $128  $87  $64  
Contributions Paid$468  $180  $119  $90  

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On June 19, 2017, the Company and MVB Mortgage approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief Executive Officer of MVB Mortgage is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017. If executive completes three years of continuous employment with MVB Mortgage prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal consecutive monthly installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The liability accrued for this obligation was $1.0 million and $783 thousand as of June 30, 2020 and December 31, 2019, respectively. Service cost was $109 thousand and $102 thousand for the three-month periods ended June 30, 2020 and 2019, respectively. Service cost was $219 thousand and $203 thousand for the six-month periods ended June 30, 2020 and 2019, respectively.

Note 13 – Comprehensive Income

The following tables present the components of accumulated other comprehensive income (“AOCI”) six months ended June 30, 2020 and 2019:
(Dollars in thousands)Six Months Ended June 30, 2020Six Months Ended June 30, 2019Three Months Ended June 30, 2020Three Months Ended June 30, 2019 
Details about AOCI ComponentsAmount Reclassified from AOCIAmount Reclassified from AOCIAmount Reclassified from AOCIAmount Reclassified from AOCIAffected line item in the Statement where Net Income is presented
Available-for-sale securities   
     Unrealized holding gains (losses)$830  $(168) $554  $(50) Gain (loss) on sale of securities
 830  (168) 554  (50) Total before tax
 (225) 45  (150) 13  Income tax expense
 605  (123) 404  (37) Net of tax
Defined benefit pension plan items   
     Amortization of net actuarial loss(210) (136) (105) (68) Salaries and benefits
 (210) (136) (105) (68) Total before tax
 57  37  28  18  Income tax expense
 (153) (99) (77) (50) Net of tax
Investment hedge
Carrying value adjustment833  126  (960) (332) Interest on investment securities - taxable
833  126  (960) (332) Total before tax
(225) (34) 259  90  Income tax expense
608  92  (701) (242) Net of tax
Total reclassifications$1,060  $(130) $(374) $(329)  

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(Dollars in thousands)Unrealized gains (losses) on available for-sale securitiesDefined benefit pension plan itemsInvestment HedgeTotal
Balance at December 31, 2019$2,942  $(4,295) $32  $(1,321) 
     Other comprehensive income (loss) before reclassification1,434  (1,246) —  188  
     Amounts reclassified from AOCI(605) 153  (608) (1,060) 
Net current period OCI829  (1,093) (608) (872) 
Balance at June 30, 2020$3,771  $(5,388) $(576) $(2,193) 
Balance at March 31, 2020$3,773  $(4,734) $(1,277) $(2,238) 
     Other comprehensive income (loss) before reclassification402  (731) —  (329) 
     Amounts reclassified from AOCI(404) 77  701  374  
Net current period OCI(2) (654) 701  45  
Balance at June 30, 2020$3,771  $(5,388) $(576) $(2,193) 
Balance at December 31, 2018(3,384) (3,422) —  (6,806) 
     Other comprehensive income (loss) before reclassification4,781  (619) —  4,162  
     Amounts reclassified from AOCI123  99  (92) 130  
Net current period OCI4,904  (520) (92) 4,292  
Stranded AOCI—  —  —  —  
Mark to Market on equity positions held at December 31, 2017—  —  —  —  
Balance at June 30, 2019$1,520  $(3,942) $(92) $(2,514) 
Balance at April 1, 2019(1,941) (3,614) (334) (5,889) 
     Other comprehensive income (loss) before reclassification3,424  (378) —  3,046  
     Amounts reclassified from AOCI37  50  242  329  
Net current period OCI3,461  (328) 242  3,375  
Balance at June 30, 2019$1,520  $(3,942) $(92) $(2,514) 

Note 14 – Revenue Recognition

The Company records revenue from contracts with customers in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and fees earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contract-revenue (i.e. gross versus net). Based on the evaluation, the Company determined that the classification of certain debit and credit card processing related costs should change (i.e. costs previously recorded as expense in now recorded as contract-revenue). These classification changes resulted in immaterial changes to both revenue and expense. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to beginning retained
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earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts related to the debit and credit card related cost reclassifications discussed above.

Service Charges on Deposit Accounts

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

Debit Card and Interchange Income

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

Consulting Income

Consulting income is comprised of consulting revenue generated by Chartwell and Paladin. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention, and enterprise risk management services that include consulting, outsourcing, testing, and training solutions. Paladin provides an extensive and customizable suite of fraud prevention services for merchants, credit agencies, Fintech companies, and other vendors to help clients and partners defend against threats. Chartwell and Paladin account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. The services promised are then evaluated in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Both Chartwell and Paladin's services included in its contracts are distinct from one another. The transaction price for each contract is determined based upon the consideration expected to be received for the distinct services being provided under the contract. Revenue is recognized as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, factors considered include contract terms, payment terms, an whether there is an alternative future use of the product or service. Consulting engagements may vary in length and scope but will generally include the review and/or preparation of regulatory filings, business plans, financial models, and other risk management services to customers within financial industries. Revenue from consulting services is recognized upon completion of deliverables as outlined in the consulting agreement.

Other Operating Income

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

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The following presents noninterest income, segregated by revenue streams in scope and out of scope of Topic 606, for the periods indicated:
(Dollars in thousands)Six Months Ended June 30, 2020Six Months Ended June 30, 2019Three Months Ended June 30, 2020Three Months Ended June 30, 2019
Service charges on deposit accounts$736  $648  $286  $333  
Debit card and interchange income342  322  242  181  
Consulting income1,950  —  941  —  
Other385  556  123  297  
Noninterest income in scope of Topic 6063,413  1,526  1,592  811  
Noninterest income out of scope of Topic 60652,950  33,626  43,921  25,576  
Total noninterest income$56,363  $35,152  $45,513  $26,387  

Note 15 – Discontinued Operations

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

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

There were no assets or liabilities related to discontinued operations at June 30, 2020 or December 31, 2019.

Net income from discontinued operations, net of tax, for the three and six months ended June 30, 2020 and 2019, was as follows:

Six Months Ended June 30Three Months Ended June 30
(Dollars in thousands)2020201920202019
NONINTEREST INCOME
Other operating income$—  $600  $—  $600  
Total noninterest income—  600  —  600  
Income from discontinued operations, before income taxes$—  $600  $—  $600  
Income tax expense - discontinued operations—  154  —  154  
Net income from discontinued operations$—  $446  $—  $446  
Note 16 – Acquisitions and Divestitures

The First State Bank Acquisition

As previously disclosed, on April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. This was deemed to be a strategic opportunity to acquire deposits and certain assets of an institution that operated in counties contiguous to the Company's Southern WV market and further solidified the strategy for growth within core commercial markets. The Company has accounted for this acquisition under the acquisition method of accounting in accordance with FASB ASC Topic 805, "Business Combinations," whereby the acquired assets and assumed liabilities were recorded by the Company at their estimated fair values as of their acquisition date. Fair value estimates were based on management's acceptance of a fair market valuation analysis performed by an independent third-party firm.

In the first quarter 2020, the Bank submitted a bid to the FDIC which included a bid based upon acquiring loans at a discounted
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amount, and also assuming the deposits of First State with no deposit premium. The Bank was notified that it was the winning bidder in the process, and the net asset discount accepted by the FDIC was $33.2 million. Immediately after the closing of this transaction, the FDIC remitted these funds to the Bank. As part of this transaction the Bank acquired three branch locations in Barboursville, Teays Valley, and Huntington, W.Va. for aggregate consideration of approximately $1.5 million. Also included was other real estate owned (“OREO”) at 46.5% of the book value, along with deposits with an aggregate value of approximately $140.0 million, cash and investment securities of $37.0 million and loans with a book value of $83.5 million. Net proceeds received from the FDIC for the transaction was $39.6 million.

The acquired assets and assumed liabilities of First State were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of First State. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds, and estimated loss factors to measure fair values for the acquired loans. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities. These values are subject to change based on continued evaluations of appraisals and other loan-related assumptions.

The statement of net assets acquired and the resulting bargain purchase gain recorded is presented in the following tables. As explained in the notes that accompany the following table, the purchased assets and assumed liabilities were recorded at the acquisition date fair value.

(Dollars in thousands)As recorded by The First State BankFair Value AdjustmentsAs recorded by MVB
Assets
Cash and cash equivalents$26,053  $—  $26,053  
Investment securities - available for sale at fair value10,964  —  10,964  
Loans83,514  (22,861) (a)60,653  
OREO22,610  (10,520) (b)12,090  
Premises and equipment, net1,582  (12) (c)1,570  
Accrued interest receivable and other assets2,234  211  (d)2,445  
Total Assets$146,957  $(33,182) $113,775  
Liabilities
Deposits - transaction accounts$70,931  $—  $70,931  
Deposits - certificates of deposit$69,029  $2,560  (e)$71,589  
Total deposits$139,960  $2,560  $142,520  
FHLB and other borrowings5,800  —  5,800  
Accrued interest payable and other liabilities411  —  411  
Total Liabilities$146,171  $2,560  $148,731  
Net identifiable assets acquired over/(under) liabilities assumed$786  $(35,742) $(34,956) 

(a) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by First State.
(b) Adjustment reflects the fair value of OREO acquired.
(c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
(d) Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts and the fair value adjustment to other assets.
(e) Adjustment arises since the interest rates paid on interest-bearing deposits where higher than rates available in the market on similar deposits as of the acquisition date.

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The following table summarizes the acquired assets and assumed liabilities in the First State acquisition as of the acquisition date, and the pre-tax bargain purchase gain of $4.7 million recognized on the transaction.

(Dollars in thousands)
Assets acquired at fair value:
Cash and cash equivalents$26,053  
Investment securities - available for sale at fair value10,964  
Loans60,653  
OREO12,090  
Premises and equipment, net1,570  
Accrued interest receivable and other assets2,445  
Total fair value of assets acquired$113,775  
Liabilities acquired at fair value:
Deposits$142,520  
FHLB and other borrowings5,800  
Accrued interest payable and other liabilities411  
Total fair value of liabilities acquired$148,731  
Net assets assumed at fair value$(34,956) 
Transaction cash consideration received from the FDIC39,627  
Bargain purchase gain, before tax$4,671  

Acquired Loans

The following table outlines the contractually required payments receivable, cash flows the Company expects to receive, non-accretable credit adjustments, and the accretable yield for all First State loans as of the acquisition date:
(Dollars in thousands)Contractually Required Payments ReceivableNon-Accretable Credit AdjustmentsCash Flows Expected to be CollectedAccretable FMV AdjustmentsCarrying Value of Loans Receivable
Purchased credit impaired loans$86,823  $24,842  $61,981  $11,746  $50,235  
Purchased performing loans12,818  2,561  10,257  1,817  8,440  
Other purchased loans1,978  —  1,978  —  1,978  
Total$101,620  $27,403  $74,217  $13,563  $60,653  

At the acquisition of First State, the Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. On the acquisition date, the Company segmented the loan portfolio into six loan pools: performing commercial, performing commercial real estate, performing consumer and residential real estate, classified commercial, classified commercial real estate, and classified consumer and residential real estate. Of the 934 loans acquired, 663 were determined to be of deteriorated credit and will be accounted for under ASC 310-30 and considered purchased credit impaired loans. The 271 remaining loans acquired will be accounted for under ASC 310-20 and considered purchased performing loans. Other purchased loans include premium finance loans, credit cards, and overdrawn escrow accounts.

The Company had an independent third party determine the net discounted value of cash flows on approximately 718 performing loans totaling $39.5 million. The valuation took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures, and remaining balances. These performing loans were segmented into pools based on loan and payment type and in some cases, risk grade.

The Company established a credit risk-related non-accretable difference of $24.8 million relating to these acquired, credit-impaired loans, reflected in the recorded net fair value. We further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $11.7 million at acquisition relating to these impaired loans.

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The following table discloses the impact of the FDIC-assisted acquisition of First State since the acquisition date through June 30, 2020. This table also presents certain pro forma information (net interest income and noninterest income ("Revenue") and net income) as of the First State acquisition had occurred on January 1, 2019. The pro forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Deal-related costs from the First State acquisition of $1.2 million have been excluded from the three and six-month periods of 2020 pro forma information presented below and included in the three and six-month periods of 2019 pro forma information below. The actual results and pro forma information were as follows:

Six Months Ended June 30, Three Months Ended June 30,
(Dollars in thousands)RevenueNet IncomeRevenueNet Income
2020:
Actual First State results included in Consolidated Statements of Income since acquisition date$5,851  $2,944  $5,851  $2,944  
Supplemental consolidation pro forma as if First State had been acquired January 1, 2019$95,509  $16,345  $62,616  $15,404  
2019:
Supplemental consolidation pro forma as if First State had been acquired January 1, 2019$82,603  $21,045  $48,200  $15,288  

Paladin, LLC Acquisition

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

Divestiture of Four Eastern Panhandle, WV Branches

As previously disclosed, on April 24, 2020, the Company completed the previously announced sale of certain assets and liabilities of four branch locations to Summit Financial Group, Inc. Summit assumed $188.1 million in deposits and acquired $36.8 million in loans, as well as cash, real property, personal property and other fixed assets. The Company recognized a gain of $9.6 million related to this transaction and was recorded in noninterest income for the three and six months ended June 30, 2020. The associated assets and liabilities were included in assets and deposits of branches held for sale, respectively, as of December 31, 2019 and March 31, 2020. Assets and deposits of branches held for sale were $0 as of June 30, 2020. The completion of this sale resulted in the Company exiting the Eastern Panhandle, WV market.

For further discussion on deal-related costs, see "Noninterest Expense" section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

Note 17 – Subsequent Events

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

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On July 1, 2020, the Company announced the completion of MVB Mortgage’s combination with Intercoastal Mortgage Company, to become one of the largest independently-owned residential mortgage lending operations in the Mid-Atlantic region: Intercoastal Mortgage, LLC (“ICM”). Per the terms of the agreement, MVB Mortgage contributed substantially all of its assets and in exchange will receive common units representing 47% of the common interest of ICMC, as well as $7.5 million in preferred units. The Company will recognize its ownership as an equity method investment, initially recorded at fair value. Management is in the process of finalizing the fair value accounting on this transaction, but the Company expects to recognize a gain in the range of approximately $1.0 million to $3.0 million.

For further discussion on deal-related costs, see "Noninterest Expense" section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of our consolidated financial condition at June 30, 2020 and December 31, 2019 and the results of our operations for the three and six months ended June 30, 2020 and 2019. This discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report and the audited consolidated financial statements and the notes to consolidated financial statements included in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019.

Forward-Looking Statements:

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

•statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of the Company and its subsidiaries (collectively “we,” “our,” or “us”), including the Bank; and
•statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook,” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing our view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known and unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in this Management’s Discussion and Analysis section. Factors that might cause such differences include, but are not limited to:

•our ability to successfully execute business plans, manage risks, and achieve objectives;
•changes in local, national and international political and economic conditions, including without limitation changes in the political and economic climate, economic conditions and fiscal imbalances in the United States and other countries, potential or actual downgrades in rating of sovereign debt issued by the United States and other countries, and other major developments, including wars, natural disasters, epidemics and pandemics, including the COVID-19 outbreak, military actions, and terrorist attacks;
•changes in financial market conditions, either internationally, nationally, or locally in areas in which we conduct operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;
•fluctuations in markets for equity, fixed-income, commercial paper, and other securities, including availability, market liquidity levels, and pricing; changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;
•our ability to successfully conduct acquisitions and integrate acquired businesses;
•potential difficulties in expanding our businesses in existing and new markets;
•increases in the levels of losses, client bankruptcies, bank failures, claims, and assessments;
•changes in fiscal, monetary, regulatory, trade and tax policies and laws, including the recently enacted Tax Reform Act, and regulatory assessments and fees, including policies of the U.S. Department of Treasury, the Federal Reserve, and the FDIC;
•the impact of executive compensation rules under the Dodd-Frank Act and banking regulations which may impact our ability and other American financial institutions to retain and recruit executives and other personnel necessary for their businesses and competitiveness;
•the impact of the Dodd-Frank Act and the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”), and rules and regulations thereunder, many of which have not yet been promulgated, on our required regulatory capital and liquidity levels, governmental assessments on us, the scope of business activities in which we may engage, the manner in which we engage in such activities, the fees that our subsidiaries may charge for certain products and services, and other matters affected by the Dodd-Frank Act and these international standards;
•continuing consolidation in the financial services industry; new legal claims against us, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies, or changes in existing legal matters;
•success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
•changes in consumer spending and savings habits;
•increased competitive challenges and expanding product and pricing pressures among financial institutions;
•inflation and deflation;
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•technological changes and our implementation of new technologies;
•our ability to develop and maintain secure and reliable information technology systems;
•legislation or regulatory changes which adversely affect our operations or business;
•our ability to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by the FASB or regulatory agencies;
•costs of deposit insurance and changes with respect to FDIC insurance coverage levels; and
•other risks and uncertainties detailed in Part I, Item 1A, Risk Factors in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2019.

Except to the extent required by law, we specifically disclaim any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
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Summary of Results of Operations

Six Months Ended June 30Three Months Ended June 30
(Dollars in thousands, except per share data)2020201920202019
Earnings and Per Share Data:
     Net income from continuing operations$19,082  $18,123  $18,034  $14,931  
     Net income from discontinued operations—  446  —  446  
     Net income19,082  18,569  18,034  15,377  
     Net income available to common shareholders18,853  18,326  17,919  15,255  
     Earnings per share from continuing operations - basic1.58  1.54  1.50  1.27  
     Earnings per share from discontinued operations - basic—  0.04  —  0.04  
     Earnings per share - basic1.58  1.58  1.50  1.31  
     Earnings per share from continuing operations - diluted1.55  1.41  1.49  1.15  
     Earnings per share from discontinued operations - diluted—  0.03  —  0.03  
     Earnings per share - diluted1.55  1.44  1.49  1.18  
     Cash dividends paid per common share0.18  0.075  0.09  0.04  
     Book value per common share18.48  16.46  18.48  16.46  
     Weighted average shares outstanding - basic11,948,790  11,625,903  11,954,813  11,644,061  
     Weighted average shares outstanding - diluted12,156,214  13,139,612  12,011,845  13,155,302  
Performance Ratios:
     Return on average assets - continuing operations 1
1.84 %2.02 %3.29 %3.27 %
     Return on average assets - discontinued operations 1
— %0.05 %— %0.10 %
     Return on average assets 1
1.84 %2.07 %3.29 %3.37 %
     Return on average equity - continuing operations 1
17.57 %19.66 %32.89 %31.30 %
     Return on average equity - discontinued operations 1
— %0.48 %— %0.93 %
     Return on average equity 1
17.57 %20.14 %32.89 %32.23 %
     Net interest margin 2 3
3.73 %3.52 %3.78 %3.53 %
     Efficiency ratio 4
63.73 %61.02 %52.11 %49.83 %
     Overhead ratio 1 5
5.60 %4.33 %6.09 %4.47 %
Asset Quality Data and Ratios:
     Charge-offs$1,779  $676  $23  $676  
     Recoveries$12  $5  $8  $2  
     Net loan charge-offs to total loans 1 6
0.24 %0.10 %— %0.20 %
     Allowance for loan losses$17,742  $11,168  $17,742  $11,168  
     Allowance for loan losses to total loans 7
1.19 %0.84 %1.19 %0.84 %
     Nonperforming loans$14,061  $6,768  $14,061  $6,768  
     Nonperforming loans to total loans0.94 %0.51 %0.94 %0.51 %
Capital Ratios:
     Equity to assets10.32 %10.95 %10.32 %10.95 %
     Bank Leverage ratio9.50 %10.77 %9.50 %10.77 %
     Bank Common equity Tier 1 capital ratio12.24 %13.18 %12.24 %13.18 %
     Bank Tier 1 risk-based capital ratio12.24 %13.18 %12.24 %13.18 %
     Bank Total risk-based capital ratio13.31 %13.97 %13.31 %13.97 %
1 Annualized for the quarterly periods presented
2 Net interest income as a percentage of average interest earning assets
3 Presented on a fully tax-equivalent basis
4 Noninterest expense as a percentage of net interest income and noninterest income
5 Noninterest expense as a percentage of average assets
6 Charge-offs less recoveries
7 Excludes loans held for sale
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Introduction

Corporate Overview

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

MVB Bank was chartered in 1997 and commenced operations in 1999.

In 2012, MVB Bank acquired Potomac Mortgage Group, Inc. (“PMG” which began doing business under the registered trade name “MVB Mortgage”), a mortgage company in the northern Virginia area, and fifty percent (50%) interest in a mortgage services company, Lender Service Provider, LLC (“LSP”). In 2013, this fifty percent interest (50%) in LSP was reduced to a twenty-five percent (25%) interest. In 2017, a forfeiture of a partial interest occurred, which increased the interest owned to thirty-three percent (33%). At this time, LSP began doing business as Lenderworks.

MVB Insurance was originally formed in 2000. In 2013, MVB Insurance became a direct subsidiary of the Company. MVB Insurance continues to operate its title insurance business, which is immaterial in terms of revenue. The Company reorganized MVB Insurance as a subsidiary of the Bank in 2016.

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

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

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

On March 2, 2020, the Bank and PMG (dba MVB Mortgage), entered into an Agreement by and among the Bank, PMG, Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the mortgage origination services businesses of PMG and Intercoastal. Pursuant to the terms of the Agreement, on the closing date, Intercoastal converted into a Virginia limited liability company and PMG contributed substantially all of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of Intercoastal, representing 47% of the common interest of Intercoastal, as well as $7.5 million in preferred units (the “Transaction”). The completion of the Transaction is subject to certain regulatory approvals, conditions precedent and normal customary closing conditions. In the Agreement, the Bank, MVB Mortgage, and Intercoastal have made customary representations, warranties, and covenants, including covenants to enter into ancillary agreements related to the Transaction and the operation of the business following the completion of the Transaction. MVB will recognize its ownership as a fair value equity investment and will no longer consolidate MVB Mortgage’s financial results. The Company closed this transaction on July 1, 2020, as discussed further in Note 17, “Subsequent Events” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On April 3, 2020, the Bank entered into a Purchase and Assumption Agreement with the FDIC, as receiver for The First State Bank, Barboursville, W.Va., providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no
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deposit premium and to acquire the assets at a discount to book value. The Bank also acquired three branch locations in Barboursville, Teays Valley, and Huntington, W.Va. This transaction is discussed further in Note 16, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

On April 17, 2020, Paladin Fraud, LLC, a West Virginia limited liability company and indirect wholly owned subsidiary of MVB Financial Corporation, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, and upon the terms and conditions set forth therein, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC. This transaction is discussed further in Note 16, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Business Overview

The Company’s primary business activities, through its subsidiaries, are primarily community banking and mortgage banking. The Bank offers its clients a full range of products and services including:

•Various demand deposit accounts, savings accounts, money market accounts, and certificates of deposit;
•Commercial, consumer, and real estate mortgage loans and lines of credit;
•Debit and credit cards;
•Cashier’s checks and money orders;
•Safe deposit rental facilities; and
•Non-deposit investment services.

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

The Bank’s financial products and services are offered through its financial service locations and automated teller machines (“ATMs”) in West Virginia and Virginia, as well as telephone and internet-based banking through both personal computers and mobile devices. Non-deposit investment services are offered through an association with a broker-dealer. The Bank has deployed Automated Interactive Teller machines (“AITs”) in several branch locations. AITs provide services by featuring video interaction with a bank employee upon request. A client can deposit cash and checks and withdraw cash, as well as a variety of other services typically occurring in a traditional branch location.

Since its opening in 1999, the Bank has experienced significant growth in assets, loans, and deposits due to strong community and client support in Marion and Harrison counties in West Virginia, expansion into Monongalia, Kanawha, Putnam, and Cabell counties in West Virginia and into Fairfax and Loudoun counties in Virginia. Since the acquisition of PMG, mortgage banking is now a much more significant focus, which has opened increased market opportunities in the Washington, DC metropolitan region, North Carolina, and South Carolina and added enough volume to further diversify the Company’s revenue stream. Mortgage banking will continue to be a focus after the recent transaction, but the activity will be captured through the Company's equity method investment in Intercoastal.

This discussion and analysis should be read in conjunction with the prior year-end audited consolidated financial statements and footnotes thereto included in the Company’s 2019 filing on Form 10-K and the unaudited financial statements, ratios, statistics, and discussions contained elsewhere in this Form 10-Q.

At June 30, 2020, the Company had 494 full-time equivalent employees.

The Company’s principal office is located at 301 Virginia Avenue, Fairmont, West Virginia 26554, and its telephone number is (304) 363-4800. The Company’s Internet web site is www.mvbbanking.com.

Application of Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with U. S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements; accordingly, as this
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information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the consolidated financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal forecasting techniques.

The most significant accounting policies followed by the Company are presented in Note 1, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s 2019 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in management’s discussion and analysis of operations, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and accounting for business combinations to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of losses inherent in classifications of homogeneous loans based on the Bank’s historical loss experience and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Non-homogeneous loans are specifically evaluated due to the increased risks inherent in those loans. The loan portfolio also represents the largest asset type in the consolidated balance sheet. Note 1, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s 2019 Annual Report on Form 10-K, describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Allowance for Loan Losses” section of Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q.

Accounting for business combinations involves the allocation of the fair value of the purchase consideration of acquisitions to the tangible assets, liabilities, and intangible assets acquired based on their estimated fair values. Purchase price allocations for business acquisitions require significant judgments, particularly with regards to the determination of value of identifiable assets, liabilities, and goodwill. Often, third-party consultants are used to assist in valuations requiring complex estimation. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of purchased assets or assumed liabilities. On the date of acquisition, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. The Company must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield which will have a positive impact on interest income. Loans that do not have evidence of credit deterioration at acquisition are accounted for under ASC 310-20, Nonrefundable Fees and Other Costs. For more information on the Company's business combinations, please see Note 16, “Acquisitions and Divestitures” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q. For more information on the Company's loan portfolio, please see Note 4, “Loans and Allowance for Loan Losses” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.



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Results of Operations

Overview of the Statements of Income

For the three months ended June 30, 2020, the Company earned $18.0 million compared to $14.9 million in the second quarter of 2019, excluding discontinued operations. Net interest income increased by $3.9 million, noninterest income increased by $19.1 million, and noninterest expenses increased by $12.9 million.

The increase in net interest income was driven by an increase of $1.3 million in interest income and a decrease of $2.6 million in interest expense. The increase in interest income was due to average loan growth of $278.3 million with the tax-equivalent yield on loans and loans held for sale decreasing by 49 basis points, primarily due to a decrease in commercial loan yield of 50 basis points and a decrease in real estate loan yield of 51 basis points. The decrease in interest expense of $2.6 million was due the cost of interest-bearing liabilities decreasing by 84 basis points, primarily due to a decrease in cost of funds on borrowings of 153 basis points, a decrease in cost of funds on money market checking of 104 basis points and a decrease in cost of funds on certificates of deposits of 93 basis points, which was offset by growth in average interest-bearing liabilities of $89.7 million. The decrease in interest expense was mainly driven by an $843 thousand decrease in interest expense on FHLB and other borrowings, due to both a decrease in FHLB and other borrowings balances and a decrease in cost of funds on borrowings, a $723 thousand decrease in interest expense on money market checking, as a result of a decrease in rates, and a $696 thousand decrease in interest expense on certificates of deposit, through a decrease in the rates of certificates of deposits. FHLB and other borrowings decreased by $77.2 million while the cost of funds on borrowings decreased by 153 basis points compared to the three months ended June 30, 2019. Money market checking increased by $101.8 million while the cost of funds on money market checking decreased by 104 basis points compared to the three months ended June 30, 2019. Certificates of deposit increased by $80.3 million while the cost of funds on certificates of deposit decreased by 93 basis points compared to the three months ended June 30, 2019.

The increase in noninterest income was primarily the result of an increase in the gain on derivatives of $12.3 million, an increase in the gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $5.1 million due to increased mortgage production, and an increase in the bargain purchase gain of $4.7 million. This increase was offset by a $13.6 million decrease in holding gain on equity securities.

The increase in noninterest expense was mainly driven by the increases in salaries and benefits of $9.4 million, largely driven by an increase in mortgage production, as well as the build-out of the fintech operations team. Professional fees expense increased by $2.1 million and data processing and communications increased by $764 thousand. Of the increases in professional fees and data processing and communications expense, $1.2 million and $499 thousand, respectively, were deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

The provision for loan losses, which is a product of management’s formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provision of $6.6 million and $600 thousand were made for the three months ended June 30, 2020 and 2019, respectively. The drastic increase in loan loss provision is mainly the result of changes to the qualitative adjustment factors, in addition to changes in the outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and the resulting changes in the historical loss rates.

Most notably, the qualitative adjustment factors were severely impacted in the second quarter of 2020, as a result of the COVID-19 pandemic. While the ultimate timing and severity of impacts to the economic and business conditions in which we operate are not yet fully known, it is clear that the impacts will continue to be significant and it is likely that the impacts will evolve over time as businesses and individuals learn to adapt to a new way of operating and living. The breadth of the world-wide pandemic and the fact that it impacts virtually every industry has inherently created additional risk within the loan portfolios, despite there being no change to the nature of those portfolios. Furthermore, as a result of the ongoing analysis of the loan portfolios, it has become apparent that a significant number of borrowers are experiencing a strain on their operations, and as a result present an increase in the volume and severity of problem loans. Additionally, it is evident that consumer sentiment has been impacted, although not as significantly as during the Great Recession. Other significant factors include the increasingly volatile social atmosphere, the evolving political climate as the election approaches, and the possibility and timing of a vaccine. The unprecedented initiatives of the Federal Government to provide support to the economy through new loan programs, has simultaneously served to temporarily mitigate some of the impacts to our economy and our borrowers, while also adding some degree of increased risk to lending policies and procedures as a result of the pace and manner in which these programs have been developed and made available to the public. As a result, quantifiable evidence of the impacts to our loan portfolios have not yet fully revealed themselves in terms of delinquent loans or deterioration in collateral values. Meanwhile, as of quarter-end, management had not made any significant changes to lending strategies that would impact the concentrations of credit risk within those portfolios.
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Meanwhile, total loan volume, excluding performing loans and purchased credit impaired loans acquired from First State, increased $41.7 million in the second quarter of 2020 versus a decrease of $15.1 million in the second quarter of 2019. The commercial loan portfolio increased by $28.3 million for the second quarter of 2020, in comparison to $23.0 million in the second quarter of 2019, while the residential mortgage loan portfolio increased by $16.7 million in the second quarter of 2020, while decreasing by $37.0 million in the second quarter of 2019. Included in the commercial and total loan volume increases are PPP loans totaling $89.8 million as of June 30, 2020. In addition, charge-offs in the second quarter of 2020 totaled $14 thousand, in comparison to $674 thousand in total charge-offs in the second quarter of 2019. Lastly, provision was impacted by a $1.0 million increase in the specific loan loss allocations in the second quarter of 2020, relative to a $589 thousand decrease in the second quarter of 2019.

For the six months ended June 30, 2020, the Company earned $19.1 million compared to $18.1 million for the six months ended June 30, 2019, excluding discontinued operations. Net interest income increased by $6.1 million, noninterest income increased by $21.2 million, and noninterest expenses increased by $19.2 million. 

The increase in net interest income was driven by an increase of $2.4 million in interest income and a decrease of $3.7 million in interest expense. The increase in interest income was due to average loan growth of $214.5 million, offset by the tax-equivalent yield on loans and loans held for sale decreasing by 37 basis points, primarily due to a decrease in commercial loan yield of 39 basis points. The decrease of $3.7 million in interest expense was due to a 113 basis point decrease in the cost of funds on FHLB and other borrowings and a 64 basis point decrease in the rates on certificates of deposits, offset by a $50.8 million increase in average interest-bearing liabilities. The decrease in interest expense was driven by a $1.5 million decrease in interest expense on FHLB and other borrowings and a $1.4 million decrease in interest expense on certificates of deposit. Average FHLB and other borrowings decreased by $68.2 million, while the cost of funds on FHLB and other borrowings decreased by 113 basis points compared to the six months ended June 30, 2019. Average certificates of deposit decreased by $6.7 million, while the cost of funds on certificates of deposit decreased by 64 basis points compared to the six months ended June 30, 2019.

The increase in noninterest income was primarily the result of an increase in the gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $9.6 million, due to increased mortgage production, an increase in the gain on derivatives of $8.3 million, and an increase in the bargain purchase gain of $4.7 million. This increase was offset by a $13.8 million decrease in holding gain on equity securities.

The increase in noninterest expense is mainly due to an increase in salaries and benefits of $13.8 million, largely driven by an increase in mortgage production, as well as the build-out of the Fintech operations team. Professional fees expense increased by $2.6 million and data processing and communications increased by $939 thousand. Of the increases in professional fees and data processing and communications expense, $1.2 million and $499 thousand, respectively, were deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

The provision for loan losses, which is a product of management’s formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provision of $7.7 million and $900 thousand were made for the six months ended June 30, 2020 and 2019, respectively. The drastic increase in loan loss provision is mainly the result of changes to the qualitative adjustments factors, in addition to changes in the outstanding balances of the loan portfolios, changes in the level of recognized charge-offs, and the resulting changes in the historical loss rates.

The increase in loan loss provision is most attributable to the severe impact of the COVID-19 pandemic on the qualitative adjustment factors, as described in more detail above. The historical loss rates were also uniquely impacted during the six months ended June 30, 2020 as a result of revisions to the portfolio segmentation, which were implemented to allow for the enhanced assessment of risk within the portfolio. More specifically, the most material enhancement included new commercial loan segments for purchased participation loans and government lease financing loans, as well as the division of the sole residential mortgage segment into a permanent mortgage segment and a construction mortgage segment. In general, this slightly reduced historical loss rates for the previously existing segments as it transitioned certain historical loan losses into the new segments. The most material impact of this enhancement was a $1.8 million charge off of a government lease financing loan stemming from the non-renewal of the underlying government contract unrelated to the COVID-19 pandemic, which was reflected in the new government lease financing segment. This single charge-off increased the historical loss rate by 67 basis points, or 145%, specific to this segment.

Meanwhile, total loan volume, excluding performing loans and purchased credit impaired loans acquired from First State, increased $20.6 million in the six months ended June 30, 2020 versus a decrease of $56.0 million in the six months ended June 30, 2019. More specifically, the commercial loan portfolio increased by $36.4 million in 2020, in comparison to a decrease of
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$38.9 million in 2019, while the residential mortgage loan portfolio increased by $6.6 million in 2020, while decreasing by $18.6 million in 2019. Included in the commercial and total loan volume increases are PPP loans totaling $89.8 million as of June 30, 2020. In addition, specific loan loss allocations increased by $973 thousand in the six months ended June 30, 2020, in comparison to a decrease of $509 thousand in the six months ended June 30, 2019. Lastly, the charge-offs totaled $1.8 million during the six months ended June 30, 2020 versus $671 thousand for the same time period in 2019.

Interest Income and Expense

Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest-bearing liabilities. Interest-earning assets include loans, investment securities, and certificates of deposits in other banks. Interest-bearing liabilities include interest-bearing deposits and repurchase agreements, subordinated debt, and Federal Home Loan Bank (“FHLB”) and other borrowings. Net interest income is a primary source of revenue for the bank. Changes in market interest rates, as well as changes in the mix and volume of interest-earning assets and interest-bearing liabilities impact net interest income.

Net interest margin is calculated by dividing net interest income by average interest-earning assets. This ratio serves as a performance measurement of the net interest revenue stream generated by the Company’s balance sheet. The net interest margin continues to face considerable pressure due to the current rate environment and competitive pricing of loans and deposits in the Bank’s markets.

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

For the three months ended June 30, 2020 versus 2019, the Company was able to grow average loans and loans held for sale balances, including the related accretion from the acquired First State loans, by $278.3 million to $1.7 billion. Average investment securities decreased $2.9 million to $220.6 million. Average interest-bearing liabilities increased by $89.7 million, primarily the result of a $101.8 million increase in average money market checking and a $80.3 million increase in average certificates of deposit balances, offset by a $77.2 million decrease in average FHLB and other borrowings and a $13.4 million decrease in average subordinated debt. An increase in the Company’s average non-interest balances of $203.8 million helped to maintain a 27-basis point favorable spread on the tax-equivalent net interest margin in 2020.

The tax-equivalent net interest margin for the three months ended June 30, 2020 and 2019 was 3.78% and 3.53%, respectively. Excluding the impact from the FDIC-assisted acquisition of First State, the fully-tax equivalent net interest margin for the quarter ended June 30, 2020 would have been 3.67%.

The 25-basis point increase in the tax-equivalent net interest margin for the three months ended June 30, 2020 was mainly the result of the decrease in the cost of interest-bearing liabilities of 84 basis points outpacing the decrease in tax-equivalent yield on earnings assets of 50 basis points.

The cost of interest-bearing liabilities decrease was mainly the result of a 434-basis point decrease in subordinated debt, a 153-basis point decrease in FHLB and other borrowings, and a 66-basis point decrease in interest-bearing deposits. More specifically, the decrease in interest-bearing deposits was as follows: a 104-basis point decrease in money market checking, a 93-basis point decrease in certificates of deposit, a 36-basis point decrease in IRAs.

The 50-basis point decrease in the tax-equivalent yield on average earning assets for the three months ended June 30, 2020 versus 2019 was primarily the result of a 49-basis point decrease in the tax-equivalent yield on loans and loans held for sale and a 27-basis point decrease in the tax-equivalent yield on investment securities. More specifically, the decrease in the tax-equivalent yield on loans and loans held for sale was driven by a decrease in the yield on commercial loans of 50 basis points and a 51-basis point decrease in yield on real estate loans.

For the six months ended June 30, 2020 versus 2019, the Company was able to grow average loans and loans held for sale balances, including the related accretion from the acquired First State loans, by $214.5 million to $1.6 billion. Average investment securities decreased $4.3 million to $221.9 million. Average interest-bearing liabilities increased by $50.8 million, primarily the result of a $118.1 million increase in average money market checking and a $27.0 million increase in average NOW, offset by a $68.2 million decrease in average FHLB and other borrowing balances and a $13.4 million decrease in average subordinated debt. An increase in the Company’s average non-interest balances of $159.2 million helped to maintain a 28-basis point favorable
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spread on the tax-equivalent net interest margin in 2020.

The tax-equivalent net interest margin for the six months ended June 30, 2020 and 2019 was 3.73% and 3.52%, respectively.

The 21-basis point increase in the tax-equivalent net interest margin for the six months ended June 30, 2020 was mainly the result of the decrease in the cost of interest-bearing liabilities of 61 basis points outpacing the decrease in tax-equivalent yield on earning assets of 36 basis points.

The 61-basis point decrease in cost of interest-bearing liabilities for the six months ended June 30, 2020 versus 2019 was mainly the result of a 377-basis point decrease in subordinated debt, a 113-basis point decrease in FHLB and other borrowings, and a 44-basis point decrease in interest-bearing deposits. More specifically, the decrease in interest-bearing deposits was as follows: a 64-basis point decrease in certificates of deposit, a 56-basis point decrease in money market checking, a 12-basis point decrease in IRAs.

The 36-basis point decrease in the tax-equivalent yield on average earning assets for the six months ended June 30, 2020 versus 2019 was primarily the result of a 37-basis point decrease in the tax-equivalent yield on loans and loans held for sale and a 26-basis point decrease in the tax-equivalent yield on investment securities. More specifically, the decrease in the tax-equivalent yield on loans and loans held for sale was driven by a decrease in commercial loan yield of 39 basis points and a decrease in real estate loan yield of 40 basis points.

Company and Bank management continuously monitor the effects of net interest margin on the performance of the Bank and, thus, the Company. Growth and mix of the balance sheet will continue to impact net interest margin in future periods. During periods of decreasing rates, yields will continue to decline. The Company has some protection from this as loans with balances of $613.5 million have rate floors. Of these, $607.8 million have rate floors above 1 percent, $588.8 million have rate floors above 2 percent, $582.4 million have rate floors above 3 percent, $487.1 million have rate floors above 4 percent, $238.5 million have rate floors above 5 percent, and $42.9 million have rate floors above 6 percent.

Net Interest Income and Net Interest Margin (Average Balance Schedules)

The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (on a tax-equivalent basis). The average balances presented are derived from daily average balances.
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Three Months Ended June 30, 2020Three Months Ended June 30, 2019
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$44,095  $16  0.15 %$9,582  $52  2.18 %
CDs with other banks12,811  64  2.00  14,579  73  2.01  
Investment securities:
     Taxable96,760  477  1.98  123,803  768  2.49  
     Tax-exempt 2
123,806  1,248  4.04  99,664  1,132  4.55  
Loans and loans held for sale: 1
     Commercial1,165,649  14,319  4.93  965,652  13,065  5.43  
     Tax exempt 2
8,879  104  4.69  13,047  144  4.44  
     Real estate532,386  5,701  4.30  446,825  5,363  4.81  
     Consumer6,332  129  8.17  9,396  141  6.02  
Total loans1,713,246  20,253  4.74  1,434,920  18,713  5.23  
Total earning assets1,990,718  22,058  4.44  1,682,548  20,738  4.94  
Less: Allowance for loan losses(14,253) (11,216) 
Cash and due from banks34,449  15,982  
Other assets179,806  138,299  
     Total assets$2,190,720  $1,825,613  
Liabilities
Deposits:
     NOW$367,448  $775  0.85 %$363,837  $839  0.92 %
     Money market checking429,708  564  0.53  327,904  1,287  1.57  
     Savings41,485  8  0.08  39,661  1  0.01  
     IRAs12,408  47  1.52  17,718  83  1.88  
     CDs495,519  1,642  1.33  415,201  2,338  2.26  
Repurchase agreements and federal funds sold9,682  5  0.21  11,644  11  0.38  
FHLB and other borrowings76,739  252  1.32  153,926  1,095  2.85  
Subordinated debt4,124  23  2.24  17,491  287  6.58  
     Total interest-bearing liabilities1,437,113  3,316  0.93  1,347,382  5,941  1.77  
Noninterest bearing demand deposits454,486  250,658  
Other liabilities79,826  36,729  
     Total liabilities1,971,425  1,634,769  
Stockholders’ equity
Preferred stock7,334  7,834  
Common stock12,030  11,695  
Paid-in capital123,351  117,648  
Treasury stock(1,437) (1,084) 
Retained earnings79,820  59,512  
Accumulated other comprehensive (loss)(1,803) (4,761) 
     Total stockholders’ equity219,295  190,844  
     Total liabilities and stockholders’ equity$2,190,720  $1,825,613  
Net interest spread (tax-equivalent)3.51 %3.17 %
Net interest income and margin (tax-equivalent) 2
$18,742  3.78 %$14,797  3.53 %
Less: Tax-equivalent adjustments$(284) $(268) 
Net interest spread3.46 %3.11 %
Net interest income and margin$18,458  3.72 %$14,529  3.46 %

1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the three months ended June 30, 2020 and 2019, which is a non-GAAP financial measure. See the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure following this table.
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Six Months Ended June 30, 2020Six Months Ended June 30, 2019
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$28,869  $65  0.45 %$8,570  $102  2.40 %
CDs with other banks12,680  126  1.99  14,678  145  1.99  
Investment securities:
     Taxable104,932  1,143  2.18  130,164  1,647  2.55  
     Tax-exempt 2
116,997  2,358  4.04  96,060  2,191  4.60  
Loans and loans held for sale: 1
     Commercial1,127,430  28,182  5.01  958,782  25,659  5.40  
     Tax exempt 2
10,319  238  4.63  13,646  300  4.43  
     Real estate481,053  10,655  4.44  429,278  10,304  4.84  
     Consumer6,903  251  7.29  9,524  268  5.67  
Total loans1,625,705  39,326  4.85  1,411,230  36,531  5.22  
Total earning assets1,889,183  43,018  4.57  1,660,702  40,616  4.93  
Less: Allowance for loan losses(12,809) (11,144) 
Cash and due from banks27,608  16,034  
Other assets165,387  126,913  
     Total assets$2,069,369  $1,792,505  
Liabilities
Deposits:
     NOW$387,455  $1,573  0.81 %$360,440  $1,568  0.88 %
     Money market checking430,942  2,017  0.94  312,839  2,330  1.50  
     Savings40,527  9  0.04  39,946  2  0.01  
     IRAs14,490  125  1.73  17,771  163  1.85  
     CDs415,165  3,222  1.56  421,869  4,608  2.20  
Repurchase agreements and federal funds sold9,601  15  0.31  12,918  25  0.39  
FHLB and other borrowings96,335  825  1.72  164,515  2,324  2.85  
Subordinated debt4,124  58  2.82  17,507  572  6.59  
     Total interest-bearing liabilities1,398,639  7,844  1.12  1,347,805  11,592  1.73  
Noninterest bearing demand deposits391,872  232,699  
Other liabilities61,644  27,590  
     Total liabilities1,852,155  1,608,094  
Stockholders’ equity
Preferred stock7,334  7,834  
Common stock12,014  11,677  
Paid-in capital123,007  117,292  
Treasury stock(1,286) (1,084) 
Retained earnings77,111  54,362  
Accumulated other comprehensive (loss)(966) (5,670) 
     Total stockholders’ equity217,214  184,411  
     Total liabilities and stockholders’ equity$2,069,369  $1,792,505  
Net interest spread (tax-equivalent)3.45 %3.20 %
Net interest income and margin (tax-equivalent) 2
$35,174  3.73 %$29,024  3.52 %
Less: Tax-equivalent adjustments$(545) $(523) 
Net interest spread3.38 %3.13 %
Net interest income and margin$34,629  3.68 %$28,501  3.46 %

1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the six months ended June 30, 2020 and 2019, which is a non-GAAP financial measure. See the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure following this table.

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The following table reconciles, as of the dates set forth below, net interest margin on a fully tax-equivalent basis:
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in thousands)2020201920202019
Net interest margin - GAAP basis
Net interest income$18,458  $14,529  $34,629  $28,501  
Average interest-earning assets1,990,718  1,682,548  1,889,183  1,660,702  
Net interest margin3.72 %3.46 %3.68 %3.46 %
Net interest margin - non-GAAP basis
Net interest income$18,458  $14,529  $34,629  $28,501  
Plus: Impact of fully tax-equivalent adjustment284  268  545  523  
Net interest income on a fully tax-equivalent basis18,742  14,797  35,174  29,024  
Average interest-earning assets1,990,718  1,682,548  1,889,183  1,660,702  
Net interest margin on a fully tax-equivalent basis3.78 %3.53 %3.73 %3.52 %

Noninterest Income

Mortgage fee income, gain on derivatives, interchange income, commercial swap fee income, insurance and investment services income, income on bank owned life insurance and portfolio loan sales generate the core of the Company’s noninterest income. Also, service charges on deposit accounts continue to be part of the core of the Company’s noninterest income and include mainly non-sufficient funds and returned check fees, allowable overdraft fees and service charges on commercial accounts. 

For the three months ended June 30, 2020, noninterest income totaled $45.5 million compared to $26.4 million for the same time period in 2019. The increase in noninterest income of $19.1 million was primarily the result of an increase in the gain on derivatives of $12.3 million, an increase in the gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $5.1 million due to increased mortgage productivity, and an increase in the bargain purchase gain of $4.7 million. This increase was offset by a $13.6 million decrease in holding gain on equity securities.

The increase in the gain on derivatives of $12.3 million was largely the result of the volatility of rates due to the COVID-19 pandemic. Due to the decreases in rates, the locked pipeline as of June 30, 2020 was $414.7 million compared to $214.2 million as of June 30, 2019. The increase in gain on sale of banking centers of $9.6 million was due to the Purchase and Assumption Agreement with Summit Community Bank that the Company closed in the second quarter of 2020. The increase in mortgage fee income of $5.1 million is driven by an increase of $451.4 million in mortgage loans sold for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase in the bargain purchase gain of $4.7 million was due to the Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation, as receiver for First State, that closed in the second quarter of 2020 providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. The $13.6 million decrease in holding gain on equity securities was due to an increase in an equity valuation of the Company’s fintech investment portfolio during the second quarter of 2019.

For the six months ended June 30, 2020, noninterest income totaled $56.4 million compared to $35.2 million for the same time period in 2019. The increase in noninterest income of $21.2 million was primarily the result of an increase in the gain on sale of banking centers of $9.6 million, an increase in mortgage fee income of $9.6 million, due to increased mortgage productivity, an increase in the gain on derivatives of $8.3 million, and an increase in the bargain purchase gain of $4.7 million. This increase was offset by a $13.8 million decrease in holding gain on equity securities.

The increase in gain on sale of banking centers of $9.6 million was due to the Purchase and Assumption Agreement with Summit Community Bank that the Company closed in the second quarter of 2020. The increase in mortgage fee income of $9.6 million is driven by an increase of $623.0 million in mortgage loans sold for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.The increase in the gain on derivatives of $8.3 million was largely the result of the volatility of rates due to the COVID-19 pandemic. Due to the decreases in rates, the increase in the locked pipeline for the six months ended June 30, 2020 was 212.0% compared to 104.4% for the six months ended June 30, 2019. The increase in the bargain purchase gain of $4.7 million was due to the Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation, as receiver for First State, that closed in the second quarter of 2020 providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. The $13.8 million decrease in holding gain on equity securities was due to an increase in the valuation of the Company’s fintech investment portfolio during the second quarter of 2019.
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Noninterest Expense

The Company had 494 full-time equivalent personnel at June 30, 2020, as noted, compared to 402 full-time equivalent personnel as of June 30, 2019. Company and Bank management will continue to strive to find new ways of increasing efficiencies and leveraging its resources, while effectively optimizing client service.

Salaries and employee benefits, occupancy and equipment, travel and entertainment, dues and subscriptions, data processing and communications, mortgage processing and professional fees generate the core of the Company’s noninterest expense. The Company’s efficiency ratio was 52.11% for the second quarter of 2020 compared to 49.83% for the second quarter of 2019. This ratio measures the efficiency of noninterest expenses incurred in relationship to net interest income plus noninterest income. The increased efficiency ratio for the three months ended June 30, 2020 is the result of the growth in noninterest expense outpacing the growth in net interest income and noninterest income.

The Company had 4 separate deals take place during the second quarter of 2020. The deals included The First State Bank acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction that closed on August 1, 2020. Due to these deals, the Company incurred the following deal related costs in noninterest expense:

For the three and six months ended June 30, 2020
Professional fees$1,150  
Data processing & communications499  
Total deal-related costs$1,649  

For the three months ended June 30, 2020, noninterest expense totaled $33.3 million compared to $20.4 million for the same time period in 2019. The $12.9 million increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased by $9.4 million. The increase was primarily the result of increased mortgage production, the build-out of other Company administration, the build-out of the Fintech team, increased incentive and stock-based compensation, and the additional team members as a result of the First State acquisition, the Paladin, LLC acquisition, and the Chartwell acquisition.

Professional fees expense increased by $2.1 million. This increase in professional fees expense of $1.2 million was deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

Data processing and communications increased by $764 thousand. The increase in data processing and communications expense of $499 thousand was deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

For the six months ended June 30, 2020, noninterest expense totaled $58.0 million compared to $38.8 million for the same time period in 2019. The $19.2 million increase in noninterest expense was primarily the result of the following:

Salaries and employee benefits expense increased by $13.8 million. The increase was primarily the result of increased mortgage production, the build-out of other Company administration, the build-out of the Fintech team, increased incentive and stock-based compensation, and the additional team members acquired as a result of the First State acquisition, the Paladin, LLC acquisition, and the Chartwell acquisition.

Professional fees expense increased by $2.6 million. This increase in professional fees expense of $1.2 million was deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

Data processing and communication expense increased by $939 thousand. The increase in data processing and communications expense of $499 thousand was deal costs related to the First State acquisition, the Paladin, LLC acquisition, the sale of the Eastern Panhandle banking centers, and the MVB Mortgage transaction.

Other operating expense increased by $732 thousand. This increase was largely due to amortization of intangibles related to the 2019 Chartwell acquisition and OREO expense related to the First State acquisition.
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Travel, entertainment, dues, and subscriptions expense increased by $465 thousand. This increase was mainly driven by an increased focus on building out internal systems and efficiencies.

Return on Average Assets (Annualized)

Excluding discontinued operations, the Company’s return on average assets was 3.29% for the second quarter of 2020, compared to 3.27% for the second quarter of 2019. The increased return for the second quarter of 2020 is a direct result of a $3.1 million increase in earnings, while average total assets increased by $365.1 million, primarily the result of a $278.3 million increase in average total loans and loans held for sale and a $41.5 million increase in average other assets.

Excluding discontinued operations, the Company’s return on average assets was 1.84% for the six months ended June 30, 2020, compared to 2.02% for the six months ended June 30, 2019. The decreased return for the six months ended June 30, 2020 is a direct result of a $959 thousand increase in earnings, while average total assets increased by $276.9 million, primarily the result of a $214.5 million increase in average total loans and loans held for sale and a $38.5 million increase in average other assets.

Return on Average Equity (Annualized)

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 32.89% for the second quarter of 2020, compared to 31.30% for the second quarter of 2019. The increased return for the second quarter of 2020 is a direct result of a $3.1 million increase in earnings, while average stockholders’ equity increased by $28.5 million. The increase in average stockholders’ equity was primarily due to a $20.3 million increase in retained earnings, a $5.7 million increase in paid-in capital, and a $3.0 million decrease in accumulated other comprehensive loss.

Excluding discontinued operations, the Company’s return on average stockholders’ equity was 17.57% for the six months ended June 30, 2020, compared to 19.66% for the six months ended June 30, 2019. The decreased return for the six months ended June 30, 2020 is a direct result of a $959 thousand increase in earnings, while average stockholders’ equity increased by $32.8 million. The increase in average stockholders’ equity was primarily due to a $22.7 million increase in retained earnings, a $5.7 million increase in paid-in capital, and a $4.7 million decrease in accumulated other comprehensive loss.

Overview of the Consolidated Balance Sheets

The greatest balance changes since December 31, 2019 were as follows: total assets increased by $271.0 million, to $2.2 billion, loans increased $120.1 million, to $1.5 billion, available-for-sale investment securities decreased $15.1 million, to $220.7 million, deposits increased $598.9 million, to $1.9 billion, borrowings decreased $186.3 million, to $36.6 million, and stockholders’ equity increased by $16.6 million, to $228.5 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $78.9 million at June 30, 2020, compared to $28.0 million at December 31, 2019.

Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources, and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations as they come due.

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

Investment Securities

Investment securities, including equity securities, totaled $240.2 million at June 30, 2020, compared to $254.3 million at December 31, 2019. As of June 30, 2020, the investment portfolio is comprised of the following mix of securities:

•54.2% – Municipal securities
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•17.5% – U.S. Agency securities
•14.4% – U.S. Sponsored Mortgage-backed securities
•5.9% – Other securities
•8.0% – Equity securities

The Company and Bank management monitor the earnings performance and liquidity of the investment portfolio on a regular basis through Asset and Liability Committee (“ALCO”) meetings. The ALCO also monitors net interest income and assists in the management of interest rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, sufficient liquidity is maintained to satisfy depositor requirements and the various credit needs of its clients. The Company and Bank management believe the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

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

Loans

The Company’s loan portfolio totaled $1.5 billion as of June 30, 2020 and totaled $1.4 billion as of December 31, 2019. The Bank’s lending is primarily focused in the Marion, Harrison, Monongalia, Kanawha, Putnam and Cabell counties of West Virginia, and Fairfax and Loudoun counties of Virginia, with a secondary focus on the adjacent counties. Its extended market is in the adjacent counties. The portfolio consists principally of commercial lending, mortgage lending, which includes single-family residential mortgages, and consumer lending. The growth in loans is primarily attributable to organic growth within the Bank’s primary lending areas and Northern Virginia. Included in the amount above as of June 30, 2020, the Bank held PPP loans totaling $89.8 million. Also included in this portfolio are the loans acquired from First State: $48.4 million in purchased credit impaired loans and $10.2 million in performing loans.

Loan Concentration

At June 30, 2020 and December 31, 2019, $1.1 billion, or 77.9% and $1.1 billion, or 77.4%, respectively, of the Company's loan portfolio consisted of commercial loans, excluding performing loans and purchased credit impaired loans acquired from First State. A significant portion of the nonresidential real estate loan portfolio is secured by commercial real estate. The majority of nonresidential real estate loans that are not secured by real estate are lines of credit secured by accounts receivable and equipment and obligations of states and political subdivisions. While the loan concentration is in nonresidential real estate loans, the nonresidential real estate portfolio is comprised of loans to many different borrowers, in numerous different industries but primarily located in our market areas.

Allowance for Loan Losses

The allowance for loan losses was $17.7 million or 1.19% of total loans at June 30, 2020 compared to $11.8 million or 0.86% of total loans at December 31, 2019. The increase in this ratio was the direct result of the net impact of adjustments to the portfolio segmentation, changes in the qualitative adjustment factors, changes in the level of recognized charge-offs, changes in historical loss rates, changes in outstanding loan portfolios, and changes in the level of specific loan loss allocations. The Bank management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity, where applicable, and changes in the local and national economy. When appropriate, management also considers public knowledge and/or verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.

Capital Resources

The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings, and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds, totaling $1.9 billion at June 30, 2020.

Noninterest-bearing deposits remain a core funding source for the Bank and thus, the Company. At June 30, 2020, noninterest-bearing balances totaled $528.5 million compared to $278.5 million at December 31, 2019. Of the $528.5 million, noninterest-
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bearing balances of $192.9 million are related to Fintech opportunities and noninterest-bearing balances of $113.8 million are related to title business funds. The Company and Bank management intend to continue to focus on finding ways to increase the base of noninterest-bearing sources.

Interest-bearing deposits totaled $1.3 billion at June 30, 2020 compared to $1.0 billion at December 31, 2019.

At June 30, 2020, the Bank had brokered deposits of $125.5 million and CDs with other banks of $127.2 million. At December 31, 2019, brokered deposits totaled $63.9 million and CDs with other banks totaled $44.3 million. Due to the liquidity stress within the industry being caused by the COVID-19 pandemic, management has focused on creating liquidity in anticipation of loan deferrals and other potential cash flow disruptions. During the second quarter of 2020, commercial loans totaling $223.9 million and mortgage loans totaling $17.5 million were approved for modifications such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings.

Average interest-bearing deposits totaled $1.3 billion during the second quarter of 2020 compared to $1.2 billion during the second quarter of 2019, an increase of $182.2 million. Average noninterest bearing deposits totaled $454.5 million during the second quarter of 2020 compared to $250.7 million during the second quarter of 2019, an increase of $203.8 million. Management will continue to emphasize deposit growth opportunities from the network of current clients and Fintech partners. The Company and Bank management will also concentrate on balancing deposit growth with adequate net interest margin to meet the Company’s strategic goals.

Along with traditional deposits, the Bank has access to both repurchase agreements, which are corporate deposits secured by pledging securities from the investment portfolio, and FHLB and other borrowings to fund its operations and investments. At June 30, 2020, repurchase agreements totaled $9.8 million compared to $10.2 million at December 31, 2019. In addition to the aforementioned funds alternatives, the Bank has access to more than $423.8 million through additional advances from the FHLB of Pittsburgh and the ability to readily sell jumbo certificates of deposits to other banks as well as brokered deposit markets.

Liquidity

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

The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans, and income from loans and investment securities. During the six months ended June 30, 2020, cash provided by financing activities totaled $260.8 million, while outflows from investing activity totaled $89.3 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and CDARS. These external sources often provide attractive interest rates and flexible maturity dates that enable the Bank to match funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.

The Company has an effective shelf registration covering $75 million of debt and equity securities, of which approximately $75 million remains available, subject to Board authorization and market conditions, to issue equity or debt securities at our discretion. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.

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

Current Economic Conditions

The Company considers its primary market area to be comprised of those counties where it has a physical branch presence and their contiguous counties. This includes Marion, Harrison, Monongalia, Kanawha, Putnam, and Cabell counties of West Virginia and Fairfax and Loudoun counties of Virginia. In addition, MVB Mortgage has mortgage-only offices located in Virginia, Washington, DC, North Carolina, and South Carolina. The Bank currently operates a total of thirteen full-service banking
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branches: ten in West Virginia and three in Virginia. MVB Mortgage operates eleven mortgage-only offices, located in Virginia, within the Washington, DC metropolitan area, Maryland, North Carolina, and South Carolina. In addition, MVB Mortgage has mortgage loan originators located at select Bank locations throughout West Virginia.

The Company originates various types of loans, including commercial and commercial real estate loans, residential real estate loans, home equity lines of credit, real estate construction loans, and consumer loans (loans to individuals). In general, the Company retains most of its originated loans (exclusive of long-term, fixed rate residential mortgages that are sold). However, loans originated in excess of the Bank’s legal lending limit are participated to other banking institutions and the servicing of those loans is retained by the Bank.

The current economic climate in the Company’s primary market areas reflect economic climates that are consistent with the general national climate. Given the recent outbreak of COVID-19, the economy has been impacted both nationally and internationally. Due to the nature of this situation, it is unclear what the duration and severity of the outbreak will be. This impact has been felt within the primary market area and unemployment rates have increased significantly. Unemployment in the United States was 11.2% and 3.8% in June 2020 and 2019, respectively.

The unemployment levels in the Company’s primary market areas were as follows for the periods indicated:
May 2020May 2019
Harrison County, WV11.7 %4.1 %
Marion County, WV13.8  4.6  
Monongalia County, WV9.6  3.5  
Kanawha County, WV14.0  4.3  
Putnam County, WV11.9  4.1  
Cabell County, WV13.1  3.9  
Fairfax County, VA8.8  2.2  
Loudoun County, VA8.4  2.3  

Capital/Stockholders' Equity

For the six months ended June 30, 2020, stockholders’ equity increased approximately $16.6 million to $228.5 million. This increase consists of year-to-date net income of $19.1 million, and stock-based compensation of $1.1 million, offset by dividends paid totaling $2.4 million and an increase in other comprehensive loss of $872 thousand. As stockholders’ equity increased, the equity to assets ratio decreased 0.58% to 10.32%. The Company paid dividends to common shareholders of $2.2 million in the six months ended June 30, 2020 and $872 thousand in the six months ended June 30, 2019, and earned $19.1 million in the six months ended June 30, 2020 versus $18.6 million in the six months ended June 30, 2019, resulting in the dividend payout ratio increasing from 4.76% in the six months ended June 30, 2019 to 11.41% in the six months ended June 30, 2020.

At June 30, 2020, accumulated other comprehensive loss totaled $2.2 million, an increase in the loss of $872 thousand from December 31, 2019. This change was driven by a decrease of $1.3 million in the unrealized gain on TIF bonds, an increase of $1.1 million in the other comprehensive loss related to the pension plan, an increase of $2.1 million in the unrealized gain on available-for-sale investment securities, and a decrease of $608 thousand in the other comprehensive income related to the investment hedge.

Treasury stock totaled 97,202 shares, up 29,300 shares from December 31, 2019 due to common stock repurchased during 2020.

The primary source of funds for dividends to be paid by the Company are dividends received by the Company from the Bank. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any year exceeds that years retained net profits, as defined, plus the retained net profits, as defined, of the two preceding years.

Capital Requirements

The Bank’s total risk-based capital ratio increased from 12.84% at December 31, 2019 to 13.31% at June 30, 2020. The increase in this ratio was largely due to an increase in total capital of $22.1 million, driven primarily by earnings.

The Bank is required to comply with applicable capital adequacy standards established by the FDIC (“Capital Rules”). The
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Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. State chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.

The Capital Rules, among other things, (i) include a “Common Equity Tier 1” (“CET1”) measure, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.

Under the Capital Rules, the minimum capital ratios effective as of January 1, 2015 are:

•4.5% CET1 to risk-weighted assets;
•6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
•8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
•4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio”).

The Capital Rules also include a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019. The Capital Rules also provide for a “countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

Since fully phased in on January 1, 2019, the Capital Rules require the Bank to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 10.5%; and (iv) a minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.

The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the
regulatory burden for such smaller financial institutions. In July 2019, the bank regulatory agencies finalized the rule which applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest. The rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. Generally, the final rule is effective as of April 1, 2020, however banking organizations were permitted to use this simpler regulatory capital requirements as of January 1, 2020.

In June 2016, the FASB issued an update to the accounting standards for credit losses that included the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL becomes effective January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the implementation of CECL In July 2019, the FASB proposed changes to the effective date for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities that would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable. On November 15, 2019, the FASB issued an update which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023.

Notwithstanding the foregoing, the EGRRCPA, which was enacted on May 24, 2018, simplifies capital calculations by requiring regulators to establish for insured depository institutions under $10 billion in assets a community bank leverage ratio (“CBLR”) (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions
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may elect to replace the general applicable risk-based capital requirements under the Capital Rules. Such institutions that meet the CBLR will automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualify for the CBLR test based on the institution’s risk profile. In November 2019, the federal bank regulators issued a final rule on the CBLR, setting the minimum required CBLR at 9%. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulators’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the FDIA. As required by Section 4012 of the CARES Act, the federal banking agencies temporarily lowered the CBLR to 8% on April 6, 2020. These interim final rules set the CBLR at 8% through the end of 2020, 8.5% for 2021, and then re-establish it at 9% for 2022. The final rule was effective on January 1, 2020 and the CBLR framework will be available for banks to use in their March 31, 2020 Call Report. The Bank did not elect to apply the CBLR framework in the March 31, 2020 Call Report.

Prompt Corrective Action

The Federal Deposit Insurance Act (“FDIA”) requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio, and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

As noted above, the EGRRCPA eliminated these requirements for banks with less than $10.0 billion in assets who elect to follow the CBLR.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of
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receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

At June 30, 2020, the Company is considered to be well-capitalized.

For further information regarding the capital ratios and leverage ratio of the Company and the Bank see the discussion under the section captioned “Capital/Stockholders’ Equity” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14, “Regulatory Capital Requirements” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s December 31, 2019 Annual Report on Form 10-K.

Commitments and Contingent Liabilities

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

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

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

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

Concentration of Credit Risk

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

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Regulatory

The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average balance maintained in accordance with such requirements was $0 on June 30, 2020 and December 31, 2019. During 2016, a deposit reclassification program was implemented and allowed the Company to reduce its requirement of reserve balances on hand in accordance with the Federal Reserve Board's daily Federal Reserve Requirement.

Contingent Liability

The subsidiary bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

Off-Balance Sheet Commitments

The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Market Risk

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

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

Effects of Inflation and Changing Prices

Substantially all of the Company’s assets relate to banking and are monetary in nature. Therefore, they are not impacted by inflation to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. In the banking industry, typically monetary assets exceed monetary liabilities. Therefore, as prices increase, financial institutions experience a decline in the purchasing power of their net assets.

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

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Future Outlook

The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel, technology, and processes to meet the growing compliance requirements in the industry. The Company believes it is well positioned in some of the finest markets in the State of West Virginia and the Commonwealth of Virginia and will continue to focus on the following: margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to attract core deposits to fund growth in the new markets through continued delivery of outstanding client service coupled with the highest quality products and technology. The Company is expanding the treasury services function to support the banking needs of financial and emerging technology companies, which will further enhance core deposits.

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

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

There has been considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who may be temporarily unable to work. The original tranche of PPP funding of $349 billion ran out 13 days after the program's implementation. The second tranche of PPP funding of $310 billion still has funds available as of June 30, 2020.

During the second quarter of 2020, commercial loans totaling $223.9 million and mortgage loans totaling $17.5 million were approved for modifications such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings. In addition, the Bank originated 455 PPP loans in the second quarter of 2020 with a balance of $89.8 million as of June 30, 2020.

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

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

On July 1, 2020, the Company announced the completion of MVB Mortgage’s combination with Intercoastal. Per the terms of the agreement, MVB Mortgage contributed substantially all of its assets and in exchange will receive common units representing 47% of the common interest of Intercoastal, as well as $7.5 million in preferred units. The Company will recognize its ownership as an equity method investment, initially recorded at fair value. Management is in the process of finalizing the fair value accounting on this transaction, but the Company expects to recognize a gain in the range of approximately $1.0 million to $3.0 million.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Sensitivity Management

The Company uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twenty-four-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities as of March 31, 2020. The model assumes changes in interest rates without any management intervention to change the composition of the balance sheet. According to the model run for the period ended March 31, 2020, over a twelve-month period, an immediate 100-basis point increase in interest rates would result in an increase in net interest income by 6.0%. An immediate 200-basis point increase in interest rates would result in an increase in net interest income by 11.4%. A 100-basis point decrease in interest rates would result in a decrease in net interest income of 4.8%. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its ALCO. The ALCO meets quarterly and has responsibility for formulating and implementing strategies to improve balance sheet positioning and reviewing interest rate sensitivity.

The Company has counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. The Company works with third-party investors that are generally well-capitalized, are investment grade, and exhibit strong financial performance to mitigate this risk. The Company monitors the financial condition of these third parties on an annual basis and the Company does not expect these third parties to fail to meet their obligations.

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

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

Item 4 – Controls and Procedures

The Company, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer, along with the Company’s Chief Financial Officer (the Principal Financial Officer), has evaluated the effectiveness as of June 30, 2020, of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s President and Chief Executive Officer, along with the Company’s Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.

There have been no material changes in the Company’s internal control over financial reporting during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

From time to time in the ordinary course of business, the Company and its subsidiaries are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings, the results are difficult to predict at all. The Company is not aware of any asserted or unasserted legal proceedings or claims that the Company believes would have a material adverse effect on the Company’s financial condition or results of the Company’s operations.

Item 1A – Risk Factors

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

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

The full impact of COVID-19 is unknown and rapidly evolving. The outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations, and could potentially impact the Company’s clients, providers, and third parties. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in overall business activity and financial transactions, supply chain disruptions, and overall economic and financial market instability. In response to the pandemic, many states, including those where the Company primarily operates, have taken preventative and protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of homes, and ordering temporary closures of businesses that have been deemed to be non-essential. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The ultimate effects of COVID-19 on the broader economy and the markets that the Company serves are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income, and therefore, earnings, financial condition, and results of operations. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

In March 2020, the Company announced programs to support our Trusted Partners during the COVID-19 pandemic. A number of borrowers have enrolled in programs to defer all loan payments for periods up to six months. These programs may negatively impact revenue and other results of operations in the near term, and, if not effective in mitigating the effect of COVID-19 to clients, may adversely affect the business and results of operations more substantially over a longer period of time.

The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 pandemic, as well as ongoing or new governmental, regulatory, and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which the Company operates. This could result in further decline in demand for banking products and services, and could negatively impact, among other things, liquidity, regulatory capital, and future growth. Any one or more of these developments could have a material adverse effect on the business, financial condition, and results of operations.

The Company is taking precautions to protect the safety and well-being of our Trusted Partners. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can we predict the level of disruption which will occur to our employee's ability to provide the expected level of client support and service. If the Company is unable to recover from a business disruption on a timely basis, the business, financial condition, and results of operations could be
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materially and adversely affected. The Company may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect the business, financial condition and results of operations.
The extent to which COVID-19 impacts the Company's business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, the Company may continue to experience materially adverse impacts to our business as a result of the virus’ global economic impact, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future.

A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of current clients, there is typically a substantial amount of total unfunded credit commitments, which is not reflected on the balance sheet. Actual borrowing needs of clients may exceed expectations, including due to the COVID-19 pandemic, as clients’ companies may be more dependent on our credit commitments due, among other things, business challenges, a lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from private investment firms. This could adversely affect the Company's credit quality and liquidity, which could adversely affect the Company's ability to fund operations and meet obligations as they become due and could have a material adverse effect on the business, financial condition, and results of operations.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent is not yet known and the Company cannot predict the full extent of the impacts on the business, the operations, or the global economy as a whole.

The Company may be adversely affected by the emergency actions taken by the U.S. government to mitigate the impact of the COVID-19 pandemic on the U.S. economy.

The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy. Among other steps taken, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the interest rate on emergency lending at the discount window and lengthened the term of loans to 90 days. On March 27, 2020, the CARES Act was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. The SBA was tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the U.S. Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.

There can be no assurance that these interventions by the U.S. government will be successful in mitigating the impact of the COVID-19 pandemic and it is unclear what the cumulative effect of these extraordinary actions by the U.S. government will be on the economy as a whole and upon the financial condition and results of operations of the Company and its clients, both in the short-term and the long-term.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company is subject to additional risks of litigation from clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.

On March 27, 2020, President Trump signed the CARES Act which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $310 billion of PPP loan funding was authorized. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of litigation, from both clients and non-clients that contacted the Bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against the
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Company and is not resolved in a favorable manner, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on the Company's business, financial condition, and results of operations.

The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny the Bank's liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.

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

(a) Not applicable.

(b) Not applicable.

(c) Issuer purchases of Registered Equity Securities:

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

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

In May 2020, the Company repurchased 100 shares of its outstanding common stock, with an average share price of $14.18.

In June 2020, the Company repurchased 29,200 shares of its outstanding common stock, with an average share price of $13.53.

The following table reflects share repurchase activity during the three months ended June 30, 2020:

PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plans or Programs
April 1 - April 30, 2020—  —  —  4,739,177  
May 1 - May 31, 2020100  14.18  100  4,737,759  
June 1 - June 30, 202029,200  13.53  29,200  4,342,683  
29,300  29,300  

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits
The following exhibits are filed herewith:

Certificate of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MVB Financial Corp.
Date:August 6, 2020By:/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
Date:August 6, 2020By:/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)


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